22 July 2020

Language Intimidation

"Poker is a skill game pretending to be a chance game."
-- James Altucher


I often say that trading is similar to poker...and it is.
  • A key to both is risk management
  • There is the potential for both tremendous upside and downside
  • Decisions must be made with imperfect information based on probabilistic outcomes and finally on this shortlist
  • Emotional control is the ultimate Holy Grail
As I may have mentioned once or twice, much of my trading method is a result of applying the logic of poker to trading. If you're unfamiliar with poker, the goal is to create asymmetric outcomes... in other words, lose just a little when you lose and win substantially more when you win.
“It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.” 
--George Soros
I retaught myself to play poker by looking up poker hands on the internet, learning a bit about the probabilities of getting particular hands, and then playing on my mobile phone... incessantly.

And I got pretty good.

Ultimately, I took a grubstake of $500.00 and turned it into a little over $20mm in about 2 months before I had to update that phone. [Fortunately, I took a screenshot before that RIMM decided to mandate said update.]  

Cash of $18.29M and At Table $3.36M

After that, I incorporated many of the elements of that poker strategy into my existing trading approach. 

I'd say it's been successful.

At any rate, I tell that story because I was watching a bit of the WSOP recently and found myself getting a bit anxious. Not because I didn't know the cards the same way... nor because I was unsure about whether to fold, call or raise based on what was on the board.

No, I started to question my understanding because I didn't know all the "cool" terminology.

Because I didn't know a back raise from a catch-up... a dead hand from a dead blind.

I started to wonder if the poker game on my phone was rigged in my favor.

And then it hit me.

That's the exact problem many new traders face. They worry so much about the fancy terminology that they often forget what's really going on.

Here's the rub... if you buy Stock A, Stock A moves up, you sell Stock A, you make money. Similarly, if you buy Stock A, Stock A goes down, and you sell, then you lose money.

The exact same thing happens in the opposite direction. If you're short a stock and that stock falls allowing you to buy it back, you make money. If it goes up when you're short and you cover higher, you lose money.

My point is this... don't let the fancy talk intimidate you.

Trading is simple... treat it as such.

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