Prior to trading, I played poker actively for about 6 years. When starting out and after two years of paying tuition fees, a turning point for me was when I read Dusty Schmidt’s Treat Your Poker Like A Business, which helped transition my mindset and game from one of taking uninformed gambles to take systematic and calculated risks.
Once I started trading, I quickly realized that many of the lessons picked up from the tables were directly applicable, familiar concepts such as bankroll management, tilt, and positive expected value, come to mind.
In this article, we’ll go through 5 key concepts, explain how they are related to trading, and what we can learn from them to become better traders.
1. Managing Your Bankroll & Protecting Your Capital
The term bankroll management in poker refers to the same risk management concept in trading.
Just like how professional poker players compete at a stake where their bankroll covers at least 100 buy-ins, professional traders typically risk no more than 1% per trade. This is only a general guideline, as more aggressive players may play with just 20 buy-ins, or a trader risking up to 5% a trade.
Protect your capital! Trading takes a lot of skill, and if you think that everyone trading is making money, think again. It’s not that making money is difficult (especially in this cryptocurrency bull market), but rather, the difficulty lies in preserving capital and keeping the profits. A common saying goes, “take care of your losses, and your profits will take care of themselves.”
Trading cryptocurrencies come with a high degree of exchange risk. Your capital is your inventory, and there’s a huge risk not only in losing your money but also your time invested if the site you’re on shuts down tomorrow. Keep you money with reputable exchanges, spread it out over various locations, and never invest more than you can afford to lose!
2. Dealing with Variance & Playing a +EV Game
Variance is basically that which deviates from the norm, be it good or bad. And this is where the concept of expected value comes into the picture. Short term variance is part of the game, and it is important to understand that trading is a marathon, not a sprint. The difference between gamblers and professional poker players or traders is that the latter focus on the outcome of playing the long game.
To avoid being a gambler, one must make trades that have a positive expected value. Do you know the expected value of the trades you make in the market? To really understand what are your odds of making a profit, and the expected size of that profit requires establishing a set of rules and testing those rules over a large number of trades so you can determine the expected value of your strategy rules.
You may want to buy any coin that has strong fundamentals and a market capitalization of $10m or less, or one that has retested the 200 MA support.
Sounds like a good idea, but is it? Only testing that rule over many trading examples and market conditions can really tell you if this simple approach to the market is an effective one.
Strategies do not have to be complicated. They do need to be well tested! If you approach the market without a set of trading rules and an understanding of the expected value of your trading approach, you are a gambler. Yes, you will get lucky and could make great profits. However, in the long run, the profits of the gambling trader are just short term loans.
3. Knowing Your Risk Tolerance
As Dusty Schmidt put it, “part of growing your business is coming to an understanding of how much risk you can tolerate.”
If you have a mindset that you must move up [in stakes] quickly, trade a large size, risk a large amount, and manage your bankroll liberally, you’re setting yourself up for a really big mistake in the long run. That is a gambler’s mentality with which few people can succeed long term. I look at trading not as a gamble, but as a skill. I want to make a small business out of that skill, and like most businesses, I don’t want to risk having to close up shop. Staying open is the goal first and foremost; maximizing profit is second.
4. Determining Your Style & Knowing When You Have an Edge
Just like how there are different playing styles in poker, such as loose-aggressive, or tight-passive; there are various styles of trading and investing, such as day trading, scalping, position trading, growth investing, value investing, and many more. As an aspiring trader, it is important that you understand your own circumstances, risk preferences, goals, and develop a strategy that suits your style.
To find an edge in poker is to understand who the fishes are at the table. From the Rounders movie, “listen, here’s the thing. If you can’t spot the sucker in your first half-hour at the table, then you ARE the sucker.” Also, having an edge means to play hands with positive expectancy, knowing when you have a better hand than your opponent, and maximizing your profit, while minimizing losses when behind.
In trading, this is akin to first understanding the general market conditions, then taking trades with positive expectancy, that is, trades that stand to win more than they lose over the long term, so that you make more in your winning trades than lose in your losers.
A common mistake new traders make is in being myopic about technical analysis, without factoring in critical overarching concepts such as the general market conditions, market cycles, trader psychology, and risk management. Why sit at a table with 8 sharks? If general market conditions are not favorable, don’t take the trade. In poker, you typically play less than 15% of your hands in a full ring table. Similarly, in trading, sit out when you don’t have an edge.
5. Managing Your Emotions
Traders who have played poker should be familiar with something called “going on tilt.” In the poker world, this refers to a state of psychological or emotional frustration or confusion that causes the player to start making decisions that are less than ideal. Usually, this means adopting overly aggressive strategies that are unlikely to work, and which the player would never use in a more psychologically sound state of mind. Poker players usually go on tilt because they are frustrated with their own mistakes, with bad luck, or with other players. Does that sound familiar?
If we are not emotionally prepared for the possibility of losing, we are more likely to be thrown by losses. We set ourselves up for the tilt state by needing and expecting to win, rather than letting probabilities play themselves out and accept that there will be winning and losing periods.
Emotional control can also be improved by understanding probability and variance, and setting long term monetary goals instead of short term ones. Respect your risk management plan, and lose your ego. When you know you are on tilt or off your A game, the faster you get off the tables (or stop trading for the day), the more money you will save in the long run.
There is a multitude of lessons that traders can learn from professional poker players since both involve similar characteristics of incentive, risk-taking, strategy, probability, emotions, psychology, and mental discipline. Success is determined not so much by which strategy but the determination and discipline by the trader to carry out the plan. At the end of the day, be careful not to treat trading like gambling. Remember, trading is a business more than anything!