At first glance, you might think it odd to suggest there is any similarity between financial trading and playing poker. After all, one is an investment vehicle based on research and knowledge of financial markets, the other is a card game.
But there is one key area that links successful traders and poker players: psychology. Poker players are not the hard-drinking, hard-gambling degenerates that the top Wild West films would have you believe. Instead, these days, they are more likely to be educated, good at mathematics and adept in the laws of probability.
But what makes a case for reading on is that good poker players have mastered the psychology of the game. Learn the psychology of poker, and you can apply the same principles to your financial trading. Just look at the following scenarios.
Coping with losses
The worst thing a poker player can do is let his or her emotions get the better of them if they lose some money. Good players know that losses are part and parcel of the game. Not everyone can win all the time.
And if you play the hand correctly and someone gets lucky and beats you, don’t get mad. The point is that in the long term, playing correctly in this situation will make you a winner, so accept the occasional blip.
Apply this same logic to your trading. If you have a bad day, perhaps you went short on the Nasdaq, but the market soared, then don’t get mad. Don’t go chasing your losses – that generally ends badly, too. Instead, so long as you made your trading decision for the right reasons, accept that this time the market was out of line and that over time, you’ll be right more often than not.
Learn to get maximum value or to get out cheap
One of the fundamental rules of poker is that to be a long-term winner, winnings must exceed your losses. That stands to reason, but what many won’t grasp is that you can have one win and four losses and still be in profit because it’s the amount you win or lose each time that matters.
For example, in poker, good players know if they lose four small pots of 20, 25, 50 and 60 chips, that totals 155 chips. But if they also won just one hand of 200 chips, they are in profit by 45.
The key to making this strategy work is to get maximum value for your good poker hands, working out how to get the most chips possible out of an opponent. The flip side is being able to lay down your hand the moment you smell danger, for as little cost as possible. Simply playing fewer hands, playing only with strong starting cards, will help for a start.
In trading, you’ll see how the psychology of maximising winnings and cutting losses is essential. If the market swings unexpectedly away from you, have a loss-limit in place. And if you’re on a winning trade, don’t be tempted to take profit too soon – make the most you can. Do so successfully, and you can have one winning trade, four losing trades and still make a profit.
In trading, if you don’t look after your money wisely, it’ll soon be gone. The same applies to poker, and wise players employ a strict bankroll management strategy. In its simplest form, this might be playing only 5% of your bankroll at any one time. Let’s say you have a $1,000 roll. A good player won’t sit down with more than $50 at any time. Lose that $50 and the bankroll is $950 – now the player will sit with no more than $42.50.
If the player records a nice win, and the roll shoots up to $1,200, in the next game he might sit with $60. Careful money management like this means he can increase the stakes he plays without ever risking going bust.
Getting your head around this technique is a key lesson in financial trading. Most experts would recommend investing much less than 5% in any trade. You need to be committed to it and don’t let your heart rule your head because that’s what will get you in trouble.
Any good poker player will take losses on the chin, adjust their betting strategy accordingly and head to the next game with a clear head and a positive disposition – all things that should be a priority for you when you look to make your next trade.
Learning poker might not just be a fun hobby, it might be critical in helping you turn a profit with your financial trading.