Traders hone their skills by conducting research, following the market, and maybe taking a class or two. Surprisingly, we’ve come to find that a game of Texas Hold’em and a trip to Vegas may in fact be more instrumental to trading success. Here are examples of powerful trading lessons that four successful poker players say they’ve learned from playing Hold’em, flopping a Royal Flush, and other experiences they’ve had playing poker.
#1 Never force the entry point
Patience is probably the last thing you would imagine a poker player or trader to embody, but the most successful ones will say it has been indispensable to their success.
Trading is like poker in that experienced players gain an intuition, and this allows them to let the indicators tell them when to act. Greg Kolo, a 2014 WSOP bracelet winner, remembers one day when the market was in a big downtrend. The stocks he traded were opening up pretty weak. Although he was in the midst of what he deems a “bad streak” in his trading, he didn’t succumb to temptation to make a brash decision.
He waited for the perfect entry point and used his remaining capital to go short. When the market fell further, his patience paid off and he made about a month back on losses in one day.
Kolo states, “Nobody knows for sure when a trade opportunity is going to present itself. There is no way to be 100% sure when it is going to work out. It’s similar to poker in that you have to wait for the one right moment.”
#2 Always stay composed no matter how hard it is
Great poker players and great traders agree: emotion and decision making should never mix. When stakes are high is when you need your composure the most, but those are the times when it’s easiest to lose it.
According to Mike Geraci, a business development specialist at T3 Securities (T3’s brokerage arm for customer accounts), “You should come into it with a game plan, an idea of what is going to happen. If it doesn’t happen according to what you expect, then you should have a work around.”
Geraci has mentally trained himself to let his emotions process, and he finds that most of the time they dilute and allow logic to prevail. He recalls experiences in the early days of the Bellagio where all the big games were played. His first time there, he was at a table with successful poker players who were aggressively taunting their opponents.
Geraci said he learned to tune out the intimidation instead of reacting to it. He viewed it as an opportunity to learn something from the “greats” instead of responding to the banter. However, this took a great deal of mental discipline. Says Geraci, “Being silent can be the hardest thing in the world when your emotions are boiling.”
For Geraci this mental discipline came in handy during his time trading credit default swaps in 2008. It was a highly uncertain time when there was a lot of money being thrown around recklessly. Managing all that order flow and the risk that came with it required solid composure.
David Capell of T3 Trading echoes this sentiment.
There are days when you are playing poker and somebody or something is provoking you. It’s causing you to emotionally lose control. It happens all the time in trading; one stock doesn’t act your way and the next thing you know you are putting on various positions and gambling instead of operating rationally.
Capell suggests getting up from the computer to get air or actually walking away from the poker table. At a minimum, trade or play for smaller stakes.
Maintain your “table presence” all the time, successful traders say. It can take quite a bit of discipline to remain silent when stress is high. But keeping that “poker face” does more than just keep your opponents in check. It allows you to stay focused and think logically instead of succumbing to your emotions.
#3 Look for Patterns
Poker, to trader Larry Sahr, is a game of incomplete information, a puzzle with missing pieces. By gaining the ability to infer the missing information, he’s found ways to gain an edge.
There’s a big advantage in being aware of what the other players in the poker game are doing. When you have an idea of what your opponent may have, you have completed the puzzle. This allows you to take more risk.
Likewise, Sahr has seen that in trading there are certain set ups that occur. If you’ve seen that scenario before, you’ve uncovered a piece of valuable information. Knowing this before anyone else can give you the vision to see arbitrage opportunities that aren’t apparent to others.
He recounts a time when he was able to make a profitable trade off an oil company who had a spill. The stock had been trading down for a couple of months and news kept getting worse. Everyone was piling on.
But one day it all changed.
The company’s main listing was in London although it did trade here in the US. London closes around 11:30 most days whereas we close at 4 PM. Between when it closed in London and when the stock closed in the US, it dropped almost 10%.
The television piled on and person after person was talking about bankruptcy. I had remembered the trades in the past; it reminded me of an oil company trade in 1987 that I had read about and studied.
In that case, the company had to file bankruptcy because they lost a lawsuit. But I saw a big difference between a financial institution that is losing money and an oil company that is drilling for barrels of oil in the ground. During the crisis many of the banks went bankrupt. But I knew this was different and the company was filing bankruptcy kind of as a “timeout.”
Unlike what everyone else thought, I felt that bankruptcy in this case was not going to lead to liquidation. I saw a good chance they were going to negotiate it out. First of all, they didn’t even know the liability at that point as they hadn’t even stopped the oil from spilling yet. But they also had hundreds of billions of dollars of oil in the ground. I thought about the trade from 1987 and it gave me the sense that even if they filed bankruptcy tomorrow, that would be the bottom anyways. I didn’t think it had any more downside in it.
Sahr says that the company ended up settling and the stock recovered. By the time he woke up the next morning, it had recovered the whole 10% move down. He handsomely profited. He attributes his success to recognition of a pattern that he continues to see play out in the stock market, even to this day.
#4 Master the art of risk management
People who succeed at poker and trading know that it isn’t just gambling; both require a high degree of critical thinking. Masters are able to quantify value, calculate risk, and manage it.
Geraci sees the key to poker as understanding the expected value of what you stand to gain and lose. “If you have certain cards in your hand and on the table, you have to calculate if the call is worth it.” Decisions like this are based upon the odds of what you have and what you can imagine that your opponent has. Knowing this can allow you to quantify what it is going to cost you to make that call.
Perhaps more importantly, when playing against a great player, you can expect him to have a good read on what cards you should have based on the story you’ve told so far. This allows you to represent a hand you don’t actually have, and successfully execute greatest part of poker – the “bluff.”
Mastering the art of managing risk is what separates luck from skill. For this reason, in addition to playing poker, many traders also excel at chess, backgammon and cribbage – other games of a highly strategic nature.
T3 is sponsoring these four of their traders at the World Series of Poker this year and hopefully you will have the opportunity to meet to meet them. If you’re a trader who has learned a lesson or two from the game of poker, please feel free to share them with us.
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