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Soultrader

Applying Poker Strategies to Trading The Markets

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As a professional no-limit holdem poker player prior to my trading career, I find that both professions share many similarities. Poker and trading are both a game of probabilities. Individual psychological makeup is also important to control emotions during times of tilt and euphoria.

 

In poker, a player can choose the stake he is willing to play. In the futures markets the stakes are chosen by the size of the trade. However, one of the biggest differences I found is as follows:

 

1. In poker, you are automatically offered the option to play a hand that you are dealt. For example, in no-limit holdem this can be a Q10, KK, 10J, 2-7, etc....

 

Each starting hand begins with a probability. For example, pocket 9's has a 52.4% favorite against an AK suited. The odds of getting dealt a pocket pair are 5.88%.

 

2. In trading, you are not automatically dealt starting hands. Starting hands in poker equals setups in trading. In order to hold a pocket pair, you must find a trading setup.

 

Each setup has its own set of probabilities. A setup that offers a 80% winning probability should be ranked higher than a setup that offers a 50% winning probability. The more setups a trader has the more ammunition or hands he has to play with. If a trader only trades moving average crosses, this is like playing only a KQ in poker. In poker, waiting for pocket AA's will slowly drain your capital with blinds and is definitely not the way to get rich. However, a poker player who is flexible to play a variety of hands with a variety of styles is the better player.

 

A trader needs to have different entry/exit and risk parameters for each setup. If one of your setups involves moving average crosses, make sure you apply different entry/exit and risk parameters from a scalping setup.

 

I like to consider my trading freestyle. I am very flexible with the different setups I have. Trading requires creativity. Novice traders apply too much science into trading and not enough art.

 

Trading should be compared to a game of limit holdem. No trade is worth all your chips so do not hold a no-limit mentality. When in doubt, stay flat. As long as you play the right hands and control your losses, a trader should come out ahead.

 

Good luck and best of trading.

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That being said, The Theory of Poker by David Sklansky stats that a poker player gains an edge each time he plays his hand correctly each and everytime if he knows what hand you hold. Whether that may be betting, raising even folding.

 

Now if you apply that same principle to trading as to what the "pros" are doing, you can see how they have an edge on us smaller players, but if we think like a pro, we too can take advantage of that edge.

 

I am sure we've all had losing trades in our early days. Just think what you we're going through when you went long the break of the high of the day, only too see prices drop like a stone? There is a very good chance that break out was on light volume because there was no "professional" money involved with the push. Now once that pattern has been identified on the "battlefield" in real time, step up and enter your order.

 

Understand and implement the psychological part of trading and the rest should be easy.

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no mention of 'tilt' yet so I will enter it into the conversation...

 

tilt is when you begin to play/trade worse because you have suffered some losses. frustration is the cause. tilt is a MAJOR factor in poker. if you control your 'tilt' -- you have a much better chance.

 

in poker, it is widely accepted that absolutely everyone goes on tilt to some degree. don't think for a second that you are different -- it is human nature. the key is to try to recognize the conditions for when this happens and try to remove yourself from this situation.

 

the other day I suffered a brutal stop-out -- to the tick before the market went very strongly in my favor. this was kind of like losing a big pot for most of your stack and then only have enough money for an ante while you go on to make quads vs somebodys full-house (in poker, the biggest pots are when one person makes a really big hand but someone else makes a slightly bigger hand -- as opposed to making quads when nobody else has anything).

 

I found while playing online poker -- if you suffer a string of bad luck or you make some very bad decisions and you feel the frustration coming on -- it is often just best to shut your computer down and take a break. realize that your head isn't right and you should be patient and wait for it to be right again. shutting down the computer forces you to stop. so much of trading/poker is psychological. so I have adopted this to trading -- after a brutal stop out or just a bad trade -- I will shut my Tradestation down for a bit and take a break. get some air, get some water, take a shower etc... I find this prevents a revenge trade from happening.

 

controlling TILT in trading is extremely important, just like it is in poker. I just find that you must figure out a way to accept the fact that everyone goes on tilt --- and then to try to adopt some methods to limit the damage from this crucial factor.

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Very good points Dog!! I never correlated tilt to trading, but you are right on. As a novice poker player myself, I often find tilt coming into play and have to control it. It's very easy to get out of hand in poker, esp in live face-to-face games.

 

And it's great when you are in control and recognize that as well. That's something I've learned playing here recently too - capitalize on the players that get into a strong tilt.

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<<capitalize on the players that get into a strong tilt.>>

 

this is a very significant part of an 'edge' in poker. how do you control your own tilt relative to how your competition controls theirs? do you donk-off that incremental stack or two when faced with adversity? or are you the one gaining that extra stack or two when others face adversity?

 

poker and trading are so similar. playing poker is an excellent way to learn about trading, IMO. learning to control you emotions in a small stakes poker game is much less costly than learning to control your emotions in a trading account -- where the stakes are much larger.

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