5 Lessons Traders can learn from Poker Players

I love poker almost as much as I love trading. The more I play, the more I see a strong correlation between the two. The psyche of a trader is very similar to a poker player and mastery of either requires similar things. Poker players and traders both play a game that involves chance. In both games, we can utilize methods to sway the odds in our favor. We play a game of leveraging risk based on the condition on the table or in the market. I put together a short list of the major things I believe are vital for the success for both poker players and traders. Of course there are many more things to add and I probably will compile a more comprehensive list as time goes by. Enjoy.

1. A poker player limits his risk. A poker player understands that the most important thing is to stay in the game and to do so, he must never lose all his chips.

2. A poker player does not try to win every hand. He understands that losing hands is part of the grand plan as long as he keeps his losses low.

3. A poker player waits for, and takes advantage of opportunities. He does not try to force a play but remains patient.

4. A poker player does not predict which cards he will be dealt but plays the cards that are dealt.

5. A poker player has balls of steel. He does not sweat when he is down and keeps a cool head when he is ahead.



- Still Broke

The Fine Line

There are many things that satisfy the idiom "There is a fine line between..." We try to tread carefully along this line is fear of tipping towards the wrong side.

There is a fine line between...

Ambition and Greed
Love and Hate
Confidence and Arrogance
Genius and Madness
Bravery and Stupidity

The list goes on.

We correctly identify that a slight distinction exists between these pairs but rarely seek to identify this variance. It is much easier to claim that there is no one quality that makes one desirable and the other avoided. However, identifying these subtle differences is what gives a clear path to staying on the right side of the line.

I have struggled in the past distinguishing confidence from arrogance. I considered people of great intellect and talent and thought that they must be aware of their abilities. So, if one of these people opt for the 'playing it humble' approach, that would make them liars. The alternative is to recognize their gifts and be labeled as arrogant. I won't preach on what I think defines the line between confidence and arrogance but if you can identify the key element that differentiates the two, you can take measures to avoid finding yourself on the wrong side of this line.

In trading, there is a fine line between being a profitable trader and a losing trader. It may seem like the traders making the big bucks are highly educated individuals with great insight into world economics. Or perhaps they are mathematical genius with an innate ability to visualize patterns. Even after years of trading, I am surprised at the subtle differences between a winning trader and a losing trader. One small tweak in your trading habits can be the focal point of a profitable trading career.

I was able to identify my fine line through analysis of my past trades. I noticed that I had many good trades, but lost the majority of my money in one or two bad trades. I let the losses run too much and, often times, a single trade wiped out the gains for 4 to 5 winning trades. I also noticed that I had a high percentage of losing day trades. As a swing trader, some days can get boring with no action and I sometimes try to throw in a quick daytrade to keep things interested. This break in discipline only lost me a bucks here and there but the net loss of all these trades was significant.

Practically overnight, I eliminated these discrepancies in my trading and was amazed how far I was up in the first month. I not only made the switch from a losing trader to a winning trader, but to a highly profitable trader. This line is different for each trader but it is necessary to take the time to identify this line. As a losing trader, I spent months thinking that eventually something would click and carried on trading as I always had.

When I was growing up I played the violin. I started playing when I was only 8 years old but didn't see much improvement until I was about 13. Previously, I had practiced the same time over and over, believing that repetition would build proficiency. It is said that 'practice makes perfect' but in fact, Practice Makes Permanent. Practicing something incorrectly over and over just makes you better at doing something the wrong way. I eventually practiced violin for fewer hours but spent the time to think carefully about what I was doing.

In trading, doing the wrong thing repeatedly only makes it a habit. One must take the time to pause and analyse what is going wrong and what is going right. I was able to take a couple hours to turn something that wouldn't after months of trading. In the future, I plan to analyze my trades to further eliminate mistakes and become a more profitable trader. I'll save a lot of time, a lot of grief, and a lot of money.


-Still Broke

My Missing Arm

There is a story that floats around in the world of martial arts about a young boy with the desire to learn Judo, a form of martial arts involving using leverage to throw the opponent. As daunting as this task may seem, it may have seemed a much higher mountain for this boy as he was missing his left arm.

He found a teacher that agreed to lead him on this endeavor and together they trained. The teacher taught the boy one move and asked him to practice it day after day. Months went by and the teacher had still only taught the boy one move, so the boy practiced the same move over and over.

After several months of  training, the teacher decided to enter his student in a Judo tournament so that he could get some experience in competition. The boy was puzzled and asked his teacher, "Shouldn't I learn more moves before I enter a tournament?" The teacher told him that it would be okay if the boy just tried his best.

During the tournament, the boy easily defeated his first few opponents. He was surprised, as most of the other competitors were older and more experienced, not to mention that they had both their arms. The boy continued his way through the tournament using his one move over and over until he made it to the final round. For the first time, the boy faced difficulty. His opponent was much larger and stronger than him and it was apparent that he was much more experienced. The two went at it round after round to a standstill and the boy was noticeably fatigued. During the break, the referees came to the teacher and asked if he would throw in the towel in fear that the boy would be injured if he continued. The teacher declined and told his student to keep trying his best. As soon as the next round started, the boy managed to catch his opponent off guard and threw him to the mat, winning the entire tournament.

On the drive home, the boy was elated, but confused. He asked his teacher, "How was I able to beat all of those other guys with only one move?" The teacher remained silent for a while and answered, "That move, the only known counter is to grab the left arm."

And thus, the boy's greatest weakness became his greatest strength.

___

Last year, I was diagnosed with something called cholinergic urticaria. Cholinergic urticaria is a disorder whose symptoms show the body experience an increase in temperature. The body becomes unbearably prickly from head to toe and it feels like a million angry wasps are stabbing you repeatedly. It got to the point where I would have to take off all my clothes and scratch all over to try and ease the discomfort.

Things that increase body temperature include:
Eating hot or spicy foods
Warm places/rooms
Physical exertion (including exercise)
Emotions - Anger, embarrassment, panic, etc.

The worst thing about Cholinergic Urticaria is that no one really knows what causes it and there is no cure.

I had to go through extreme measures to avoid my body warming up. At first, it seemed like all I could do was stay and home and lie in bed (without a blanket in fear of my body heating up). Over time I learned to avoid the things that triggered the cholinergic reaction. The hardest by far was controlling my emotions. Emotions are mostly a reflex and brought on by outsides stimuli. I had never been an angry person but even an emotion as mild as frustration or annoyance would trigger a painful ordeal. I tried so hard to control my emotions in the terror that I would experience another wave of hornet stings and in time, I learned to master them. I don't remember the last time I was angry or panicked.

Around the same time, I watched my performance in the stock market take off and never look back. Even to this day, I look at the positive things in life and it is almost impossible for anyone or anything to provoke me. I am a fiery and dynamic trader but I never have a flash of emotion that may affect my judgement. My cholinergic urticaria has diminished greatly to the point where I barely recognize it, but my temperament has remained the same. My greatest weakness forced me to develop my greatest strength. Looking towards the future, I hope that I can identify other traits about myself that may seem like weaknesses and find how they can be strengths.

-Still Broke

Play the Player, Not the Chart

As most people, I entered the market with the belief that the stock prices moved depending on how much money the company made. I was surprised to find that what caused stock prices to move was so simple.

People buy stock = price goes up

People sell stock = price goes down

Trading is a zero-sum game. Money is not created or destroyed (for the sake of this argument pretend the FED does not exist). Money simply trades hands. There are times in the market when everyone is making money or everyone is losing. For someone to make money, someone else has to lose money. The stock market is a free-for-all battle field and it is every man for himself. When I am trading, I don't simply look for patterns that I've learned about in books but I try to interpret them. If I can figure out what everyone else is doing, I have the advantage and can counter them. Each candle is a collection of players buying and selling and tells a story.

Who is the player? 
Institutions, big time investors, day traders, swing traders, amateurs, bagholders, the 9-5 worker, etc. Each group behaves differently and follows a different set of logic.

What are they doing?
Buying, selling, short selling, buying to cover. Although buying to open is the same action as buying to cover, one opens a position while the other closes. This difference leads to different implications on these two actions.

Why? 
This is the most difficult part. Every trader had a different reason for making a trade and a lot of the time there is a lack of reasoning. Through observing the market, it is possible to recognize certain behavior that is always present in the market including

• panic selling 
• greedy chasing
• denial/egotistical bagholding (refusal to close a losing position).

Understanding the people that are playing the market and understanding their thought process allows you to get a better indication of the 'why?'. Although it is impossible to distinguish what each individual might be thinking, it is possible to get a good sentiment on the aggregate players in the market.

Hypothetically, if you knew what every player was doing and thinking, every trade would be perfect. The closer you can get to the reality of what the market is thinking, the better your trades will be.

-Still Broke

A Game of Dollars and Sense

As stated in the previous post, I have a few days of down time before I jump back into trading. I thought this would be a good time to reflect on my long term goals. The goal when it comes to trading is straight forward: make money. Everyone may have different motivations for making money but at the end of the day, we all have two goals in trading:

1. Make Money
2. Don't Lose Money

I enjoy making money. Now that may seems like an obvious statement. Who doesn't enjoy making money. However, I found that most people in the world do not like making money. Everyone likes to  spend money, not many people like to make money. The difference is huge. Most people like having money because they like to spend money, but if they had a choice of making money or winning the lottery, they would go with the latter. I genuinely enjoy making money. Up to this point, I have no withdrawn any money from my brokerage account. I just want to watch the numbers go up up up. I do not speak of stock prices in dollars but in points. That's what the stock game is to me, a game with points for success.

I have noticed that I perform the worst when I concern myself with the monetary aspect of trading. Greed clouds judgement and influences irrational behavior. The stock market is not as complicated as most people believe but chasing money causes mistakes. Traders have strategies that work but lose big on a single trade because they went heavy whilst thinking "I'll hit the jackpot if I win this one." Traders but positions too quickly because the position is in the red when the chart shows that the trade is still in play.

It is quite ironic that to be successful in a game where money is the sole goal, one must not think about money. On a wall on my trading room I have posted, "Be ambitious not greedy. Ambition fuels motivation, greed clouds judgement." Don't grab too many peanuts or your hand will get stuck in the jar.

-Still Broke

The Blame Game and the Pattern Day Trading Rule

Dario Wunsch is professional gamer in a game called Starcraft. Starcraft is a 1 versus 1, real time strategy game where a player has the choice among three unique races to play. Since Starcraft is a computer game created by people, it inherently has imperfections and balance issues among the different races. Discussion on the balance between each race pairing has become a regular occurrence. I once had to opportunity to ask Dario on his thoughts of the current balance state of the game. I was accustom to players complaining about why one thing was too strong while another thing was too weak so I was quite surprised by Dario's answer. He said that there probably were certain imbalances in the game but that he did not concern himself with them. He said that having the mentality that something is wrong with the game discourages your practice because the player blames the game and not himself. If a player believes that his success is dependent on the game design more than his ability, the battle is already lost.

Dario Wunsch

Dario possessed a strong internal locus of control. He kept a positive attitude and always reflected on himself to see how he could improve and did not waste time complaining about things out of his control. I notice this same mentality in top athletes. A top athlete always blames himself for a loss, not his team. He does not blame the referees, the weather, or anything else. He instead reflects on what he could have done differently, thus improving himself for the next game.

Kobe Bryant - Constantly looking to improve himself

In trading, there is a rule called the Pattern Day Trading Rule where a trader with an account under $25,000 can only make three round trip, day trades in a five day rolling period. The brokerage that I use bars the trader from opening the fourth trade as to prevent any possibility for violation of this rule. Today, I had a trade setup that I had been watching for weeks. The chart unraveled just as I had speculated but when I went to enter the trade, my brokerage prevented me. Naturally, the stock price exploded and I missed out on hundreds of dollars. I posted an angry tweet about my brokerage and blamed them for this missed trade. I can moan all I want but I cannot do anything to change my brokerage's policy. What I can do is to place blame on myself. I did not keep track of my daytrades and had no idea that I had hit my third one. I could have planned more carefully since I knew that this great trade setup was near fruition. There were several things I could have done to prevent this miss but instead I blamed my brokerage.

I find that I often place blame on things outside of my control when trading. I blame my brokerage for not having shares to borrow, blame others for degrading a stock that I own, blame school for making me miss crucial trading time. It is much easier to pass blame, and there are always a countless number of possible scapegoats. Passing blame protects your psyche from shame and self-degradation but at the same time inhibits progress. As soon as we subscribe to an external locus of control, we subconsciously stop trying and inevitably fail. I cannot control these outside factors, I can only control what I do. Therefore, I must learn to reflect on what I could have done differently and improve myself for the future. Only then will I, too, be a champion.

-Still Broke

Learning to fold

In Rochester there was a mayor who desired so strongly to leave behind a legacy in the form of a project called the Fast Ferry. He devoted all his time and millions of the city's dollars with the goal of a ferry that crossed Lake Ontario from Rochester to Canada. This was no ordinary ferry. It had exquisite architecture with game rooms, casinos, and restaurants. No expense was spared in the planning and execution. Unfortunately, not much thought was devoted to the clientele. It turned out that no one wanted to ride a ferry across the lake and the project was in a deep hole. As a response, the mayor threw more money at the project trying to make it bigger and better. He added the construction of a dock that would house the ferry and ran advertising campaigns to promote the ferry and dock as attractions. The project fell further and further. There is no happy ending for this story.

Inside the Fast Ferry

Keep that story in mind and let's change directions. I've been teaching a few student how to play cards. I found that the games usually end quickly. I try to give as many opportunities as I can but in the end, I win quickly and convincingly. Most importantly, I noticed a pattern among all amateurs, one that I find the be the greatest cause of failure: Amateurs rarely fold. Folding is a move where a player will bow out of the current battle, forfeiting his capital. Amateurs do not think about the longevity of the game but are too focused on the current hand. No one wins every hand . In fact, no one even wins close to 1/2 of the rounds. The experienced players know when to cut their losses and when to continue while amateurs will dig themselves into a deeper hole, refusing to lose the small amount on the table.

As a stock trader, you MUST MUST MUST learn to fold. As an amateur, I found it difficult to take a loss. I was so focused on each individual trade and I hated to lose. I hated to lose because I hated to lose money but more importantly, I hated to lose because it represented a state of failure. I keep a log of all my trades and every red row shows a loss. I try so hard not to add another red row. At times i forget that if I make $1 million in a year, it does not matter how many losses and how many wins I have. Even if i lose 4 out of 5 trades, the value of the million is the same. In poker, I do not keep track of how many hands I lose and how many I win. I focus on the end goal of having all the chips. Losing chips here and there is part of the plan. I must cut my trading strategy from the same fabric. Trading is a long term endeavor. I will always lose trades and I will always win trades. The importantly thing is to not dig myself into a bigger hole and throw more money at a project that's a lost cause. Abandon pride and learn to fold.

-Still Broke

Impatience and Greed

I've tried this blog thing several times and each time lacked the commitment to stay consistent. On big winning days I don't want to lose my high by taking the time to pause and write a blog and on losing days, I'm too frustrated to reflect on the day. I decided that there is no need for me to compose an epic saga with each blog post so from now on I will try to write sometimes every few days, even if it's but a few sentences.

Today was a revelation day for me as I snapped myself out of a destructive trend. Through dedication and commitment (and a whole lot of luck) I managed to grow my trading account by 123% in just under 4 months. Since then, I went on a losing streak. Each loss was a large dollar amount and it seemed that I developed the bagholding mentality. Ed Seykota said that people that lose want to lose and people that win want to win. I gave this some though and saw that I had developed a destructive attitude. I was angry at the market for my losing money and continued to throw money at bad trades. The more I lost, the faster I traded.

Ever great trader says that when on a losing streak, it is time to take a break. I refused to stop because I desperately wanted to make my money back. That was the first problem: "Make my money BACK" I should have been thinking of moving forward but was, instead, so focused on a sort of revenge. The two might seem the same but the slight variance in mindset makes all the difference. I kept repeating to myself how much money I had to make to "break even" (back to my account high). I was not focused on being better but on being less bad.

Tomorrow is a new trading day, I have liquidated most of my positions, winning or losing, and will start with a clean slate and a new mindset.

-Still Broke

A Million Dollar Journey

Some famous guy once said something deep along the lines of a million mile journey starts with a single step. Well in this story, a million dollars starts with a buck. I have been trading stocks for a few years now and have decided to set a goal of 1 million dollars. I wouldn't call myself a greedy person or even one who finds great pleasure in the monetary things of life, but I am someone who desires success  Success is subjective but not in the stock world. In this world, the level of success is measured simply in dollar signs.

I hope that on this journey, I will not only develop analytical skills but also learn patience and control. I have learned that trading success is dependent more on psychology than anything else and believe that these skills can be transferred to all aspects of life. The day I make my first million trading, I will look back on the blog to see the path that I traveled on