Trade Ideas Blog

Poker Odds and Professional Trading

Sep 25, 2007

There is no doubt in my mind that the skills to succeed in poker are the same skills to succeed in trading. Unfortunately most people approach trading differently and in a way that opens them up to losses and eventual failure.

Is your hand worth playing?

In poker understanding the odds of your hand determines your success. Let’s put it in another way, is your hand worth playing? Knowing the difference is critical to success. It is much easier to get a grasp of the odds in poker because players can understand the relationships of one card to another in a deck. When it come to trading, however, all logic often goes out the window.

A poker hand can seem really tempting to play, for example your two hold cards are a pair of Sixes and you pay to see the flop. Then you flop 2 Tens and a Jack. Well now you think to yourself that you have Two Pair so it is time to start betting. I am really over simplifying for illustrative purposes, but the thing is that you really have to be careful here. How many people at the table might have a higher pair and waiting to trap you? Who might have had a Jack and now has two pair as well but a higher two pair? This, as well as the size of the pot and what are you risking versus your bank roll are all things to consider as you place bets. The seasoned professional probably would have folded his hand right after the flop if he saw anyone else raising. In poker the biggest mistakes are made when inexperienced players try to win hands they have no business in playing. Players often call or raise hands that they should have folded pre flop.

In trading the same thing happens when inexperienced traders think they know something and continue to hold on to positions that are clearly moving against them. Something about the stock market makes people do the silliest things.

Trading, like poker, is a game of statistics

If you want to win you have to know the odds of you winning versus the size of the pot. In poker it is easy to discern the odds because there is one deck and, based on the hand, you can know the probable outcomes are for different cards.

What makes trading very difficult is that it is hard to discern the odds of any particular trade. The market is not as simple to read as a deck of cards. There are very few tools out there that help a trader figure the odds of success for a particular trade. We aim to help traders figure out those odds by giving them access to the appropriately titled OddsMaker. Our OddsMaker software lets a trader calculate the odds of winning on virtually any trade. Just like in poker, knowing the odds does not guarantee success, but it goes a long way to make you succeed in the long run. At the end of the day you want consistent, frequent success from trading.

In trading I see people staying in losing trades – hoping for things to turn around – like staying in a weak poker hand to get lucky on the turn or the river. It might happen once or twice but odds are you will lose. A trader should approach his/her trades much like playing poker. Use your P/L as a guide. Don’t sit in bad trades waiting for things to turn around – the opportunity cost of tying up your capital and the mental drain is too high a toll to pay.

Related Articles and the Bloggers Who Wrote Them

Chris Perruna does a great job (possibly better) at explaining the many similarities between trading and poker over at his blog. They are always a good read:

Here is another article that points out the money management similarities between trading and poker by Dr. Brett Steenbarger: