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One of the new hobbies I discovered during lockdown is Poker. I played Texas Holdem before but without a strategy or real in-depth knowledge of the game. I did serious research on the educational website of one of the main online poker providers. Armed with a little book in which I would summarise the most important parts of each lesson, I started their course.
I finished the introductions to the game, and the first simple strategy which they taught novice players and found a lot of parallels between poker and trading.
Let’s start with position on the table. In poker the playing strategy changes depending on your position at the table. Players at early positions have much less information than players at late positions, who can observe the behavior and bets of the players before them. In trading it’s similar, but the key difference is that players don’t switch their position on the table after each hand.
Early position
Poker players in early positions need to have extremely strong hands to enter a pot. They are forced to act earliest with least information.
Retail traders are in a similar situation – they have the least amount of information, funds and technology at their disposal. It would be good practice for them to enter a trade when they have strong chances of a win. Whether they reach the situation where the odds are good enough for them to make money through technical or fundamental analysis and executed in an automated or manual way is up to them.
Middle position
Players in poker who are in the middle position can have a looser standard for a starting hand than players in the early position. However, they are still at a disadvantage when compared with players in the late position.
In trading this part of the table is taken by institutions or funds who have capital and the means to do research but lack some of the data and tools which specialists have.
Late position
Strongest position in poker. You can gather the most info from players before you. You can have weaker hands in these positions as you have the best opportunity to judge other player’s hands.
In trading these positions are held by market makers, dealers, hft and producers of commodities who have the advantage of holding a book, knowing who they are trading with and access to technology, funds and speed. All of these give them the advantage of knowing who they want to transact with, and where they would want to offload some of their exposure.
Hand ranking and good trades
Here are some of the statistics for strong starting hands in poker:
Strong starting hands win in 3 out of 4 cases.
Smaller pocket pair hands can be considered at best speculative or even trash.
A pocket pair is dealt once in every 16 hands.
For the good trader, having the perfect setup which meets all of your criteria for a good trade will likely be a winner in the same amount of cases as a strong hand in poker. Remember that even a good trade could be a loser. Sometimes something that looks like a good setup, may end up not being a winner. This is where the risk management comes in place. And last but not least, a pocket pair is dealt once every 16 hands in poker. That pocket pair may not even be a strong one. This shows that excellent opportunities to win in poker are rare. It is the same in trading. Remember the saying – ‘Patience is a virtue’?
Unpaired Cards
Unpaired cards of the same suit or high value could end up being winners in poker. Not as often as a high value paired cards but they give you an opportunity.
Setups where one or two of your criteria for a good trade are matched but the rest aren’t present, are again in my view to be considered speculative or trash. In fact, taking a trade when there isn’t one is a show of bad discipline.
Playing poker with unpaired cards of the same suit or high value goes down to managing your money and seeing how you can match your hand with the cards on the table which come later. Same in trading, if you take one of these not bad, but not perfect setups – managing your risk and cutting losses early if the trade doesn’t go your way could prove essential.
Moving on to low and unconnected cards - the weakest hands in poker. Remember the 7 and 2 hand? This is the worst hand in poker. Even more the case when the 7 and the 2 are of different suit.
Playing bad hands in poker is gambling. It is the same in trading. If you don’t have a plan or a strategy, and trade just for the sake of trading, you are gambling.
Bet sizing
In poker when your hand is strong, you try to build the pot in order to maximize your earnings.
A small bet is considered when you bet half of what is already in the pot.
A medium bet is considered between half and ¾ of the pot.
A bet is large when you bet more than ¾ of the pot.
Using a strategy which varies the trade size depending on your balance and opportunity could be utilized in trading. Some of the best traders do this. It helps with your risk management, as your trading size would become smaller, if your balance becomes lower. This means that when you are in a losing streak, or encounter a big loss, you would be betting less on following trades to build your confidence and balance back up. It also means that you aren’t going to bet the house on a marginal trade. This is what could blow your account and maybe even your trading career.
Having the money and the risk management in place in order to be able to bet big when the right opportunity comes along is essential.