How Thinking About Poker May Help Your Day Trading

Are the Odds on Your Side?

day trading and poker
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If you like day trading, you probably like poker and vice versa. There are a lot of similarities between Texas Hold'em poker and day trading, and if you know a bit about poker it can help you understand day trading, and why I can be so hard (and easy sometimes) to make money.

The analogy isn't perfect, but thinking about trading concepts in a different way may help you overcome some hurdles you're facing, or bring to light road blocks we didn't even realize where there.

Note: this isn't an introduction to poker; it's assumed readers have a basic knowledge of the game. If not, read about it here: PokerStars: Texas Hold'em.

You're Playing Against Others

Watching a price chart constantly move all day makes it's easy to forget there are actual people bidding, offering, buying and selling, causing the price move. Nothing happens without people (or computer programs run by people). When you buy, thinking an asset is going up, someone else sells to you (possibly going short), thinking it is going down.

No one is placing an order because they think now is a horrible place to buy or sell. They're placing an order because they believe they can make some money (or protect their money by exiting) by trading at that price.

Each person looks at different factors in making their trading decision. Computer algorithms may be trying to buy at the bid and sell at the offer in less than a second, while an investor placing a bid could care less whether the stocks goes up or down today because they're holding it for a year no matter what.

Despite the differences in viewpoint and analysis, each person decided now was the time act, because this moment offered some advantage to them.

Not everyone can be right.

Don't Be the Sucker

You don't have to be the best poker player at the table to make money, just don't be the worst, and know when conditions are favorable to play and when they aren't.

If day trading the SPDR S&P 500 (SPY), everyone is looking at variations of the same chart or basing their trading decisions on information that could affect the price. Therefore, we can think of price movements as poker hands, with each person receiving a hand based on the probability of their trade being profitable.

In How to Day Trade Stocks several strategies are revealed which work well, especially at certain times of the day. If you take a trade where the strategy dictates, it's equivalent to playing poker with good hole cards--AA, AK, high pair, AQ. The beautiful thing about trading is that you never have to trade when you don't have great hole cards (great trade setup).

When you get one of these good trade setups/hands it's all systems go, especially since we can assume we have a superior trade/hand compared to the person on the other side of the trade/table. Sure you can still lose a poker hand with AK or even AA, and you can lose on a great trade setup, but wouldn't you want to start each trade with the best odds possible?

If we miss our entry point or begin trading outside of our strategy/setups, our hands become lower probability. By extension, if we get a trade setup, we can assume that the person on the other side of the trade has a weak hand.

Their order sitting at our strategy's entry is a sucker's bet for them, and a good probability hand for us. We are AK and they are 27...or so we initially think.

New Information Must Be Heeded

Every time I get filled on an entry for one of my strategies I am very thankful. I found the sucker willing to give me that trade at that price (or give me action on a hand where I know I have a statistical edge). But the trade/hand isn't over; I haven't won anything yet. How the price acts after I get into the trade is like the betting/checking/folding which takes place on the flop, turn, ​and river. What was a statically solid hand to begin with, may turn out not to be based on sequence of events that follow. That 27 that gambled on the entry may end up hitting something to make their hand, and I may hit nothing, leaving me exposed.

What traders often fail to realize is that why you got into the trade, may not be a good reason to stay in it. Trading is more lenient than poker in the sense that you can exit anytime and claim a bit of profit (share of the pot) or salvage some of the money you originally bet on the trade (you originally risked $100, but the trade goes nowhere so you decide to get out for only a $50 loss).

You have to be able to walk away from your great entry--your AK--if it turns out you are beaten. This exit can be via your stop loss or manually exiting a trade before the stop loss (always use a stop loss). Bluffs will occur though. Assume you take an entry, it looks good for a bit and then pulls back, causing you to second-guess your hand. Like a poker player, as a trader you need to determine if the odds are still in your favor. A sound strategy and profit taking method helps determine that.

Great day traders are always thinking in terms of the outset of the trade, and during.

Final World on Trading and Poker

The trading poker analogy isn't perfect, but thinking about trading in a different way may spark new insight.

If buying at $10 is the entry point for a strategy you've tested and know has a winning tendency, then entering at $10 is your AK hand. Entering at a price other than what your trading plan dictates means you're trading with a lower probability hand. The further away you take a trade from the ideal entry point, the worse your hand gets. Eventually, you're the sucker playing a 27, filling someone else's order who has an AK setup. This is why you trade at the points where your strategy dictates.

Once in a trade, even though you had the statistical edge at the outset, conditions change. Trading is nice because you don't need to put all your chips in on every trade. Risk only 1% of your account, because even if you lose multiple times you have plenty of capital to take other signals. When starting out as a trader let the price hit your stop loss or target, so you don't need to worry about the "bluffs" in between. As you get better, though, you'll realize that what looked like a great trade at the beginning is no longer so, and a quick exit is warranted.

You don't need to be best trader/poker player to make money, just don't be the sucker. The only way not to be a sucker is to test a strategy for profitability and practice it in various market conditions. Then only trade when that strategy produces valid trade signals.