Having been a full-time poker player for a few years before I started my recent venture in finance, I have found many similarities between the two occupations.
When I read the book Poker Wizards, a book interviewing some of the best poker players of all time, I found it very interesting to see how the poker professionals reasoned and how it was related to the financial markets.
Let us look at what Daniel Negreanu, one of the most acclaimed and well-known poker players of all time, has to say about the traits of successful poker player:
- The one quality that I think is definitely the most important in being a successful player is having good people skills.
- The second most important quality is an aggressive personality.
- Third is discipline.
- The last quality is having a fundamental knowledge of the game, which is the easiest part.
I could not have agreed more about this list of qualities that makes a successful player. The interesting part though, is that the same thing goes for the players in the stock market or other financial markets. So let us look at these four qualities one by one when it comes to being a successful trader.
Most definitely one of the most important qualities! A good poker player knows that when the table is tight and people hold onto their money he should be more involved and putting his money in the pot more often. But if many players are involved most of the time, then he plays fewer hands.
The same thing goes for the stock market. When everyone talks about how good it is to invest in stocks and you hear stock tips just by visiting your local coffee shop, you better stay out. But when people loathe the thought of owning stocks, that is a good time to own stocks.
Another way of seeing why you need good people skill is to understand what drives the stock prices. In the long-run it is the earnings of a company that leads the way for stock prices, but in the long-run we might have gotten broke already.
In the short-run it is the hope and fear of people who decides where the stock prices moves. This is what we call market psychology or behavioral economics. Instead of fundamental analysis of the company itself, many successful traders try to measure and use people’s behaviour when analysing the outcome of a trade.
An Aggressive Personality
I prefer to call it an unafraid personality. If you assessed the risk of your strategy you must be willing to follow through your plan and not change it just because you are currently losing. When people panic they often take the wrong decision.
Even if you have the best trading plan in the world and make money 95% av the time, you might lose all those winnings in the last 5% of your trades if you trade inconsistently. You must also have discipline and routines to look over your trading on a regular basis to optimize results, but also take care of your well-being to not lose focus due to stress and other factors.
Another very important aspect that many people fail to follow is the discipline of game selection. Both poker players and traders alike love their game so much so they often join a game where they do not have an edge instead of waiting for the right opportunity. To sit out and not take a position is many times the right decision. Or to put it another way, to not get involved in losing games makes you a winner in the long-run.
Fundamental Knowledge of the Game
It is easy to get a fundamental knowledge of poker. Anyone can get it by reading a few good poker books. In the stock market this is much harder since there is not much scientific evidence about doing the right investment. Are value companies better than growth companies? Is it better to buy a stock with a low P/E? Many people have an opinion but if you ask them for some statistical evidence they think you are a donkey not taking their word for granted.
It is a big leak for a trader or investor who is using his common sense to take decisions instead of finding a scientific measurable edge. But just as in poker, those bad traders might win in the short-run and complain about being unlucky in the long-run. Do not become one of those people!
Differences between Trading and Poker
Finally I would like to point out two differences between trading and poker. In poker, many go with their gut-feeling when taking hard decisions. They might see something in their opponent, a tell, that looks suspicious, and take actions according to that. That is fine! People have had millions of years to evolve skills in reading other people’s subtle expressions. But traders usually do best in avoiding that gut-feeling that usually comes from fear or greed instead of the body language of their opponent.
The similarity, however, is that you should try switching of your emotional senses in both poker and trading to avoid taking emotionally driven decisions. So much money has been lost in both poker tables and in the stock market for those emotionally driven decision. But your own emotions are one of the toughest challenges to master no matter if you are a trader or poker player.
My last point regarding the dissimilarities between poker and trading is that trading and the financial markets is much tougher to master than poker. It is much harder to find an edge in trading than in poker. If you have two aces and get your money in before the flop, you are making a good investment. That is a fact. In trading you rarely find those facts.
I want to finish of with a quote:
“Poker is like sex. Everyone thinks they are the best, but most people don’t know what they are doing.” -Dutch Boyd
I hope you enjoyed this article. Feel free to comment!