Ten Lessons I Have Learned About Trading From Poker

At first glance you may think that trading and poker are poles apart however after you dig under the surface you quickly realise how similar they are. If you are not familiar with the game of poker I suggest you have a read of this site. The basic rules of poker are very simple to learn.

The Long Run is Really Loooooooooong

It was not until I started playing poker that I made this realisation. I am sure most of you are familiar with the Keynes quote “In the long run we’re all dead”. Basic statistics tells us that carrying out an action that has a positive Expected value will result in profit over a large series of trials. So it should come as no surprise that over a short number of trials you can find yourself losing money as a result of a positive expected value decision.

A Poker Example

To make this more concrete at the $5.2 buy-in sit and go’s on average I have a 13% ROI over a sample of 534 games. If we look at a 16 game block I lost 12 of these games and only won four resulting in a net loss of $63.20. Looking at the short run one could say I am a losing player. Below is my graph of the full 500 games:

Note: Even 534 games is to small a sample size to say I am a winning player.

Trader Lesson: Just as 16 games is to small a sample to draw inferences from so to is 16 trades. At the end of the day you will make the most profit from continually making plus expected value decisions regardless of outcome. Try not to be fazed by a small number of losing trades stick to your system.

Psychology Matters

Depending on your vintage and or educational background you may or may not have heard of Daniel Kahneman and Amos Tversky. These two psychologists developed Prospect theory which is basically a theory that deals with evaluating alternative decisions involving risk. In short the theory evaluates how people evaluate gains and losses.

Poker Example

I lose 2 buy-ins playing NLHE cash games for a loss of $50. I then play 4 $6.50 sit and goes and run very well coming first in three games and 6th in my fourth game. I make a net profit of $55 in my sit and go’s and a $5 profit for the session. However this is a very disappointing session as I have only made $5 and I weight the loss of $50 as much greater then the gain of $55.

Trader Lesson: It takes a lot of hard work and discipline to not put so much emphasis on our losses and not to fall into the outcome bias trap. Our mental state can cause us to make minus expected value decisions. There is no shame in getting professional help to work through cognitive issues that impair our performance.

Note: The best resource on trading psychology is Brett Steenbarger, his traderfeed website has many great articles some recent articles I found useful are:

• Trading Scared is Trading Scarred
• Approaching Markets With an Active Mindset
• Learning How to Trade: Managing the Psychological Risks
• Four Best Practices for Maintaining Your Focus on Markets
• My Favorite Techniques for Overcoming Performance Anxiety in Trading

Rake and Commission Matter

On the face of it both poker and trading should be a zero sum game, that is individuals losses should directly match other individuals gains. Unfortunately due to commissions, rake and taxes losers lose more then winners gain and winners gain less then losers lose. Playing poker has given me a greater appreciation for the effect that taxes and commissions have on my bottom line.

Poker Example

When starting out I like most players started playing $1.10 games that is $1 entry fee plus 10c rake, in these games one is paying 10% rake.  Below is a very crude example of how rake would effect your profitability assuming ROI was the same for both stakes:

Profit on $1000 investment at $5.20

$1000 – 192 games 25% ROI 4% rake

$1250 rake reduces our ROI to 21% => $1210

Profit on $1000 investment at $1.10 Stake

$1000 – 909 Games 25% ROI 10% rake

$1250 rake reduces our ROI to 15% => $1150

Note: This is highly simplified and in the real world ROI incorporates rake.

The image below shows my results from $1.10 Sit and Go’s. You can see that I actually paid more in rake then I  made.

Trader Lesson: Commissions and taxes are often neglected when developing a trading plan or strategy however these two factors are crucial to long term profitability. When selecting a broker you should do a comparative analysis of fees commissions volume discounts offered. As far as taxes go your best bet is to talk to a good CPA or CA and they will be able to help you with this issue. You may be surprised how much money you can save by taking these measures.

The Environment is constantly Changing

In poker and trading adaptability is crucial aspect of success. Just because you have the best possible hand on any given street does not mean that it will still be best hand on the next street. In order to succeed you have to examine your play after each new piece of information becomes available. In poker you also have to realise when your beat and cut your losses just like a trading environment.

Poker Example

I am dealt pocket aces in an 8 handed game blinds are $15/$30. Two players limp in for $30 I raise it to $120 one limper fold and the button and other limper cold calls.

Stack sizes

Me: $1480

Button: $3070

Flop

Limper checks I lead out with a $288 bet button calls then limper folds.

My thought process: This is a very bad flop for me straight draw, flush draw, KQ would make a full house. I make a small continuation bet to hopefully win the pot here. My best possible starting hand no longer looks like it can win the pot.

I check button leads out and puts me all in. I fold he shows Jack Ten making a straight.

My thought process: This is a very bad card the straight just got there my opponent could also have trip queens, best case is he has AK or flush draw. I check  and my opponents over bet tells me he has me beat. Even though it is a spot where technically a call would also be correct I opted for the safe option.

The Odds

As you can see from the above simulation if we put our opponent on his tightest range, calling would have also been an option.

Trader Lesson: Financial markets are dynamic and constantly changing and it is important to realise when these changes will effect your trading plan. In times of late we have seen some significant structural changes in markets and regulations. These changes can prove profitable or costly if you are unsure it is best to stay on the sidelines as hard as that may be.

If you don’t have a strategy you may as well burn your money

It is very important that you have a strategy when you sit down at the poker table. Not only is a strategy crucial aspect of trading and poker but a framework for analysis is also required. I have found when I started playing poker I had no strategy and played very subjectively.

My Basic Poker Strategy

Pre-Flop

• What position am I in?
• How many players are in the pot?
• how many players are left to act?
• What is my M?
• What is my opponents M?

M=Stack size / (Big Blind + Small Blind +Antes)

• What equity does my hand have against opponents range.
• Bet/Check/Fold/Raise

Post Flop

• Calculate Pot odds
• Calculate Outs
• Factor in fold equity and psychological aspects
• Bet/Check/Fold/Raise

Post game

• Review game play as a whole.
• Calculate expected value for any hands that were borderline.
• Use an ICM calculator and do a hand by hand review.

Trading Lesson: It is not enough to just have a static trading plan, you will also need to have a framework in place to evaluate the success in a quantative fashion.  A trading diary is a great way to record your thoughts and reasons for entering or exiting any given trade. Sometimes the post trade analysis can be just as important as pre trading analysis.

Trying to Make back losses is the quickest way to lose

I have to admit that I on more then one occasion I have lost money playing poker and then told myself that I am not going to stop playing until I made that money back. Guess what happened, I lost more money trying to make that money back. On one occasion I lost 6 Sit and Go’s in a row at the $20 level so I thought I would move up to the $50 level and quickly lost more.

Trading Lesson: Sometimes the best thing to do after taking a big loss is to take a break recharge the batteries and step away from your trading station. That money is gone it is a sunk cost and is not recoverable. Don’t take on more risk or stay in trades longer then your trading plan dictates in an attempt to win back your losses

Bankroll Management and Money Management Make a Difference

Risk of ruin is real and no matter what your skill level if you don’t manage your poker bankroll or trading equity properly you could be out of the game. As a trader it is even more crucial as with some financial instrument you can lose more then your initial investment.

Poker Example

We sit down at a table with our last $1435 look down at our cards and see pocket aces, we know that against any combination of two cards we have a greater then 80% chance of winning. We raise the pot to $450 and our opponent puts us all in and turns over pocket queens.

AA vs QQ  gives us an 82% chance of winning. The final outcome is shown below:

As you can see even though we got our money in good we lost our whole bankroll. If on the other hand we had 50 buy ins for this level we would be able to re-buy and continue playing.

Trading Lesson: Don’t risk it all on one trade no matter what odds you are getting. It is crucial you develop a money management plan, it does not have to be complex. A quick and easy plan would be to never risk 2.5 % of your equity on more then one trade or highly correlated group of trades.

Variance is just part of the game

Variability of return’s can be a huge frustration but it is an inherent part of the game and it keeps the gamblers coming back for more.  When you play poker you have to expect periods of negative returns. In the graph below you can see a 100 game downswing at the $3.4 stake.

In these 100 games I did nothing different to any of my other games made the same decisions same plays however the outcome was a loss.

Trading Lesson: As a trader you are in a very uncertain business. Most academic texts will say that a good investment strategy will have a low standard deviation of returns. Some of the most profitable traders of all times had very high standard deviations of returns. My advice would be don’t try and minimise variation to much find a level that is acceptable to your risk profile and learn to accept variance.

There is no such thing as a shore thing

Poker and trading both seem to attract people looking to get rich quick. There is no shortage of people looking to sell you a product or service that will make you money while you sleep or will give you the hidden secret to untold wealth.

Trading Lesson: There are no shortcuts, no hidden secrets it will take hard work, dedication and many failures to achieve true success. Question everything you read and hear, if it sounds to good to be true it probably is.

Don’t Give up Your Day Job

The title says it all. You will hear a lot of poker professionals say this to up and coming poker players however I think it has a lot of value for traders also. I know a lot of people look at trading as a way to make a lot of money quit there job and enjoy the finer things in life. However this places you under enormous pressure, there will be times when there are no trades that meet your criteria but your family still need to eat.

About the author

Mark - Is a 28 year old form Australia. He has a Bachelor in Economics and a Major in CS. He is currently working towards his CFP. His interests include algorithmic trading systems, artificial intelligence, game theory and poker.