Zen and the Art of Poker

[DbPhoenix 42]

.

If you really are interested in getting enlightened, one way would be to go off to Tibet, crawl in a cave, and sit there meditating for thirty years. Another equally good way – but much, much faster – is to trade the S&P. (Bill Williams)

 

 

Motivated by Frank's excellent MIP thread, I'm initiating this thread to explore Larry Phillips' Zen and the Art of Poker.

 

A lot of smart stuff has been posted on message boards, and much of it has been lost, not because it has literally been deleted (though that is sometimes the case), but because it has been forgotten. People move on, they quit, they die, and it's important to pass the good stuff on so that those who read it when it was posted aren't the only ones who benefit.

 

Years ago, a guy named William posted the rules from Phillips' book one by one in order to encourage reflection and discussion, and this is my purpose as well. I'm not going to post all the rules because, as I said to William at the time, not all of them are as clearly applicable to trading as others. But you will see how very applicable to trading many of these rules are.

 

There's been quite a lot of editing here. William edited the rules himself, and I've edited William's elaborations to some degree. Keeping that in mind, the bold entries are from Phillips' book and the rest, unless otherwise attributed, are William's. I'll post the rules one at a time, and I encourage those who are interested to read each one, think about it, and post those thoughts here. This thread may then become a means by which traders may grow.

[DbPhoenix 42]

RULE #1: Learn to use inaction as a weapon.

 

Most of the time, the market is indeed random. One can only win consistently by avoiding activity most of the time and trading only the few times during the day when a high probability trade occurs. It is our job as traders to wait more than we trade. (William)

Edited March 31, 2008 by MrPaul

[DbPhoenix 42]

One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people always have to be playing; they always have to be doing something. They can't just sit there and wait for something new to develop. I wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, 'I just lost my money, now I have to do something to make it back.' No, you don't. You should sit there until you find something. (Jim Rogers)

[DbPhoenix 42]

RULE #2: Don't get irritated or angered by long session of folding.

 

We are all playing probability over a long run. Understand it. Accept it. Mentally prepare for it. Keeping our heads makes all the difference. (William)

[CandleWhisperer 10]

RULE #1: Learn to use inaction as a weapon.

 

Most of the time, the market is indeed random. One can only win consistently by avoiding activity most of the time and trading only the few times during the day when a high probability trade occurs. It is our job as traders to wait more than we trade.

 

First, very nice thread. Thank you.

 

Second, I am a bit hesitant to post because I do not want to disrupt the flow. Please let me know if you would rather not have posts such as this.

 

I recently posted a chart in the VSA thread that has some applications in my mind to what has been said here.

 

Many traders, both VSAers and others, are trying to catch tops and bottoms. There is a desire to buy bottoms and seller tops. I think this is a mistake. In the chart the best entry is after the appearance of the second test (from left to right). While it is true that many methods would show other and sooner entry points, with INACTION one is able to enter at the most PROBABLE point. In other words, the "Best" price does not necessarily mean the most probable entry price.

 

One can let the market tip its hand. As someone here once said, surrendering to the market is about letting go. It is about NOT forcing the issue. It is about inaction. Getting in tune with the market is about detaching oneself from the market to clearly see it.

 

 

Often probability and inaction lead to profitability without the ego of top and bottom fishing.

[DbPhoenix 42]

I don't want to play censor, which I wouldn't be able to do anyway since I'm not a moderator. But I don't especially want to play traffic cop, either. To do so, or even to try, would throw a blanket over free discussion, and that would defeat the purpose of the thread.

 

That having been said , I equally don't want this to turn into yet another debate about VSA, MIP, SMI, candles/uncandles, bars/lines/dots, LII, and so on. What's being said in the book and in these posts is independent of all that, or should be. You may think that top and bottom-fishing is not a good idea while others do quite nicely by doing just that. You may think that candles are indispensable. Someone else may think they're silly. In other words, just because someone doesn't understand something doesn't mean it's nonsense; just because someone doesn't know how to do something doesn't mean that it can't be done.

 

Using inaction as a weapon means simply that one must learn to be "aggressively inactive" while waiting for what he has proven to himself and for himself to be high-probability setups. Someone else may think that his HP setups are completely loony, but that's not the point. They are his bread-and-butter setups, and whether or not anyone else can profit from them is irrelevant. He wouldn't be implementing them if he weren't making money with them. Unless, of course, he himself is loony.

 

It is the nature of trading that the trader is going to spend a great deal of time waiting, unless he doesn't have the discipline to wait for what he wants (though he must of course also know what it is that he wants, which is where defining the setup comes in). If the trader doesn't know exactly what it is he's looking for, then he is far more susceptible to being sucked into low-probability trades, particularly if he is eager to trade. By thinking of inaction as a weapon and using it as such, he will find himself aggressively withstanding the Sirens who are tempting him to act impetuously. He will be "aggressively inactive".

 

As to the "flow", no one should be concerned with interrupting it because there likely won't be one. There will be quite a few rules touching on a variety of subjects and there's no particular linearity. But keep in mind that these rules should apply to everyone, regardless of what he does or how he does it or when he does it or how often he does it. If everyone avoids being judgmental, everything should go swimmingly.

[DbPhoenix 42]

RULE #3: If you've been folding a lot, for a long time in the game, and you're starting to think that maybe it's time you got in and played a few hands again -- that's not a good enough reason. Keep folding.

 

The level beyond this is having no desire to act inappropriately- to be so immersed in the moment and the process that time does not exist and thus impatience does not exist.

 

Great traders have rituals they enjoy for their own sake, a method and a habit that acts as its own reason for being. When you have this mindset, impatience goes away; whatever is in front of you becomes too engaging to worry about what you aren't doing or could be doing.

 

The amount of time a trader should be willing to wait for a good trade is infinite, because with the correct mindset the trader isn't actually “waiting” in the traditional sense; being and experiencing yes, waiting no. (darkhorse)

[brownsfan019 17]

RULE #3: If you've been folding a lot, for a long time in the game, and you're starting to think that maybe it's time you got in and played a few hands again -- that's not a good enough reason. Keep folding.

 

This one hits home esp. after playing in a WSOP satellite yesterday. Long story short - I thought I was going to fold my way out of the tourney. Then lady luck came over and said hello and in a short time my $10k in chips turned into $53.5k in chips.

 

While this example is really about poker, the translation over to trading is strikingly similar.

 

Great thread DB! Keep it going!

 

As a wannabe poker player, I am enjoying it!

[DbPhoenix 42]

RULE #4: Don't feel like a martyr when folding.

 

Don't start feeling self-righteous about all this folding you are doing... as if now it owes you (because you've been so good, so disciplined, so patient...). This is a trap... As you keep folding, you must feel neutral about it. (William)

[brownsfan019 17]

Damn, this is an awesome thread about poker! (and trading)

 

 

DB - can you post links to more of this? Websites, books, etc. as I am in my learning stage of poker and have been gobbling up anything I can get my hands on.

[brownsfan019 17]

Damn, this is an awesome thread about poker! (and trading)

 

 

DB - can you post links to more of this? Websites, books, etc. as I am in my learning stage of poker and have been gobbling up anything I can get my hands on.

 

After reading the first post (duh), I believe this is the book being referenced. Correct?

 

Just want to make sure before I purchase it.

[Frank 10]

This such a true statement I have to include it in this thread:

 

"Beginning poker players [traders] sometimes ask, “What do you do in this particular situation?” There is really no correct answer to that question because it is the wrong question… The right question is: “What do you consider in this particular situation before determining what to do?”

 

– David Sklansky, ‘The Theory of Poker’

Edited April 1, 2008 by Frank

[brownsfan019 17]

This such a true statement I have to include it in this thread:

 

"Beginning poker players [traders] sometimes ask, “What do you do in this particular situation?” There is really no correct answer to that question because it is the wrong question… The right question is: “What do you consider in this particular situation before determining what to do?”

 

– David Sklansky, ‘The Theory of Poker’

 

That is a great book!

 

Here's the link to Amazon for anyone interested.

 

I think that's what may have attracted me to poker was the striking similarities between trading and playing poker. This is a great thread b/c it shows how similar the two activities are.

[DbPhoenix 42]

RULE#5: Sometimes others get to play and you don't... But the most important thing is this: you must be comfortable with this - welcome it. Make peace with this idea. Cross your arms and sit back.

 

It is silly to try to catch every swing or worry about missing a move. There are thousands of markets out there and we are missing a play ALL THE TIME. The objective is to execute the business plan with precision over a long run. Precision = Speed. Marginal, wild, random trading will only bring chaos into the statistical equation.

 

There are also internal reasons not to play. The poker adage H.A.L.T (Hungry, Angry, Lonely, Tired) basically says that if you can't play with a smile, don't play at all.

 

And scared money rarely wins. (William)

[DbPhoenix 42]

RULE#6: To win at poker you must embrace the idea of breaking even... A distaste for breaking even can lead us into the valley of pressing and overplaying and other wrongful activity.

 

We have to have a positive mindset for the long run. A one-sided expectation for a short performance interval is just going to chew us up. Breaking even or a loss is just one of the natural outcomes in a statistical run. This is the way our trading plan is supposed to work given the nature of the game... The plan is not broken. The reason we have a plan in place is to help us focus on executing sound decisions under fire. Do not make it difficult by trying to outsmart your own plan. Pressing at the last hour to meet some number in our head is just out of place.

 

When you have a glass of muddy water, you can't make it clear by stirring it. You can't make the mind clear by forcing it one way or the other. Don't force your expectations on your trading; let the Law of Large Numbers do its work in peace. (William)

[brownsfan019 17]

RULE#6: To win at poker you must embrace the idea of breaking even... A distaste for breaking even can lead us into the valley of pressing and overplaying and other wrongful activity.

 

We have to have a positive mindset for the long run. A one-sided expectation for a short performance interval is just going to chew us up. Breaking even or a loss is just one of the natural outcomes in a statistical run. This is the way our trading plan is supposed to work given the nature of the game... The plan is not broken. The reason we have a plan in place is to help us focus on executing sound decisions under fire. Do not make it difficult by trying to outsmart your own plan. Pressing at the last hour to meet some number in our head is just out of place.

 

When you have a glass of muddy water, you can't make it clear by stirring it. You can't make the mind clear by forcing it one way or the other. Don't force your expectations on your trading; let the Law of Large Numbers do its work in peace. (William)

 

I like this one a lot. It's so easy to jump ship after a bad day only to watch your plan work the next day and the next day, etc.

 

The market has a very wicked humor about her that will test your fortitude and patience with your plan one day and then show you how you *could* have made a ton the following.

[DbPhoenix 42]

This is in keeping with what Bo Yoder calls the "win-lose" cycle. I paraphrase his take in one of the stages in the "Stages of a Trader" pdf posted to my Blog:

 

After a while (sometimes a good long while), you notice a particular phenomenon which pops up regularly and seems to "work" pretty well. You focus on this pattern. You begin to find more and more instances of it and all of them work! It’s all true! It Works! Your confidence in the pattern grows and you decide to take it the very next time it appears. You take it, and almost immediately your stop is hit, and you're underwater for the total amount of your stoploss.

 

So you back off and study this pattern further. You go back to the books, back to your notes. And the very next time it appears, it works. And again. And yet again. So you decide to try again. And you take the full hit on your stoploss.

 

Practically everyone goes through this, but few understand that this is all part of the win-lose cycle. They do not yet understand that loss is an inevitable part of any system/strategy/method/whathaveyou, that is, there is no such thing as a 100% win approach. When they gauge the success of a particular pattern or setup, they get caught up in the win cycle. They don't wait for the "lose" cycle to see how long it lasts or what the win/lose pattern is. Instead, they keep touching the pot and getting burned, never understanding that it's not the pot (pattern/setup) that's the problem, but a failure on their part to understand that it's the heat from the stove (the market) that they're paying no attention to whatsoever. So instead of trying to understand the nature of thermal transfer (the market), they avoid the pot (the pattern), moving on to another pattern/setup without bothering to find out whether or not the stove is on.

[zeon 10]

Practically everyone goes through this, but few understand that this is all part of the win-lose cycle. They do not yet understand that loss is an inevitable part of any system/strategy/method/whathaveyou, that is, there is no such thing as a 100% win approach.

 

 

Isn't this a bit contradictory to what you posted earlier in another thread? You said that if a trade goes wrong, it's the trader who didn't listen to the market. So if a trader focuses on a pattern and he sees it but 3 out 10 times the pattern ends up in a losing trade, is he having trouble understanding the market or is he accepting the fact that "there is no such thing as a 100% win approach"?

[DbPhoenix 42]

If a trader has 14 losing trades in a row and hasn't the least idea why, I suggest he's looking at something other than the win-lose cycle.

[zeon 10]

If a trader has 14 losing trades in a row and hasn't the least idea why, I suggest he's looking at something other than the win-lose cycle.

 

That wasn't really my question... :\ Ofcourse I know that 14 losing trades in a row isn't "normal", which I why I stopped trading.

Edited February 17, 2009 by DbPhoenix

[DbPhoenix 42]

If a trader hasn't defined and tested his setups, he has no idea how many losing trades to expect. So the answer to your original question could just as easily be "both".

Edited February 17, 2009 by DbPhoenix
To conform to previously edited post.

[dandxg 10]

Santa got me this book based on your reco, it's simple, concise, and logical. Three things I like, and useful, 4.

 

It reminds me of the way you suggest trading do nothing until there is something to do. Its more relaxed for sure. Thanks.

[DbPhoenix 42]

RULE#7: Regard patience as a central pillar of your game and strategy... Don't assign it a secondary or lesser role.

 

Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading. (Mark Weinstein)

[DbPhoenix 42]

RULE#8: You cannot apply the principles of Zen until you know the game perfectly -- inside and out.

 

Having the proper attitude of Zen calm and confidence does no good if you do not know the game. Zen will not make up for, or offset, incorrect . . . play. As a result, there is a certain amount of ordinary, old-fashioned work involved in mastering the game -- a certain amount of sweating the white beads before the days of tranquility come along.

 

The most important thing to know, above all things, is exactly how to play the game. No outlook, attitude, or philosophy is as important as this.

 

Good [trading] is not a "mood", it is a series of individual decisions. It does not occur by "Buddhistically" meditating ourselves into some dreamlike mental state, but rather by knowing the game well and being in synch with it -- by inserting ourselves correctly into the flow of what is going on in front of us.

 

No Zen attitude will make up for this lack. You may be quite Zen-like and have all the attributes of Zen calm, but if you play incorrectly, the result is that you will get destroyed. Practice, and long hours at the table, are indispensable.

 

When I first began to cut up bullocks, I saw before me whole bullocks. After three years' practice, I saw no more whole animals. And now I work with my mind and not with my eye. My mind works along without the control of the senses. Falling back upon eternal principles, I glide through such great joints or cavities as there may be, according to the natural constitution of the animal. I do not even touch the convolutions of muscle and tendon, still less attempt to cut through large bones.

 

A good cook changes his chopper once a year, -- because he cuts. An ordinary cook, one a month, -- because he hacks. But I have had this chopper nineteen years, and although I have cut up many thousand bullocks, its edge is as if fresh from the whetstone. For at the joints there are always interstices, and the edge of a chopper being without thickness, it remains only to insert that which is without thickness into such an interstice. Indeed there is plenty of room for the blade to move about. It is thus that I have kept my chopper for nineteen years as though fresh from the whetstone.

 

Nevertheless, when I come upon a knotty part which is difficult to tackle, I am all caution. Fixing my eye on it, I stay my hand, and gently apply my blade, until with a hwah the part yields like earth crumbling to the ground. Then I take out my chopper and stand up, and look around, and pause with an air of triumph. Then wiping my chopper, I put it carefully away. (Chuang Tzu)

[DbPhoenix 42]

RULE#9: Arrive with a system... It is not enough to rely on luck or hope to carry us past the weak parts of our game. These parts must be attended to. The system must be whole and complete... The weak parts must be corrected, or disaster will appear.