Poker and Money Management

[Frank 10]

Just sharing some thoughts:

 

I was at the poker table the other night and thinking about stack size and trading. When I play poker, I sit down and play very conservatively at first. I will wait for extra profitable situations before getting involved. (This doesn't mean profits are assured on that hand, just that its a good situation over the long-run to enter the pot). Good tight, efficient poker is advised whenever ante's are low relative to avg ending pot size. (this means that you will be paid off big when you do make a big hand -- so its worth being patient as the up-front cost - the ante -- is small vs the eventual payoff).

 

Now I was thinking why should trading be any different. Your ante is effectively the cost of your internet connection (and any services to which you subscribe).

 

In poker, sometimes you sit at the table and get crap cards when in position and medicore cards when out of position (position refers to when you act in the hand vs the dealer and therefore when you have strong information advantage -- since you act later on after you see what others have done). Well, in trading -- this is kind of like trade location. If the market is showing it wants to go up, but location isn't good --- this is kind of like playing a mediocre hand 'out of position'. It is strongly profitable to play it when 'in position' -- but its marginal when out of position. This is how poker is, its extremely situational.

 

The point is -- on some days, you just aren't dealt anything when you have position.

 

Now, another safeguard in poker is to limit the downside when you just get stuck with bad luck. ie, you make a huge hand but someone else makes a slightly bigger hand --- you lose all you have on the table in that situation. This is kind of like waiting for 3 hours -- everything finally lines up for a long, and within 2 minutes of entering, a terrorist rumor hits the market and price tanks and you stop out. This is just a bad beat situation.

 

Point of this thread is to discuss poker concepts and relate them to trading so here is my thought:

 

When you start the trading day out, play very conservatively unless a very, very strong situation is created. If its not a very strong situation, don't put much money in the pot -- ie, adjust your size -- when you start the 'session' out -- remember, you have nothing invested in that situation -- don't have to play that situation unless its a strongly profitable situation. If its a modestly profitable situation, do it -- but don't get caught overplaying the value of your hand.

[brownsfan019 17]

Frank - great thread!!!

 

Personally, I am a 'constantly learning' amateur at poker, but I think the parallels to trading are quite interesting. I recently came across Don Miller's blog and he uses a lot of poker analogies, so you might want to check it out.

 

I view my trading as it is now very similar to how I play poker - a pretty straightforward, tight aggressive image. Basically I am waiting for my spots to pounce and look to get my money in w/ the best of it. That is similar to my trading now where I am watching multiple markets and looking to take the better setups that I have in my arsenal.

 

The biggest difference is that in poker I use my tight image to make bluffs where appropriate and in trading, I definitely am not looking to bluff!

 

Some other similarities that come to mind...

Need to realize when you play your best game and focus on that. In other words, have to know when you are on your best game. Seems obvious, but I play really bad, loose poker when tired. I know this, yet will play sometimes late into the night.

 

Knowing when to walk away - good or bad. With how I play poker, I am looking for 1-2 big bets per hour and if all goes as planned, I will most of them. It's VERY common for me to win a few big pots and then give a % back just b/c I feel like playing, I feel like I have 'house money', etc... It's tough b/c I enjoy playing but there are times when you need to leave.

 

Not going on tilt... obviously easier said than done. I'm known to let off some steam when I take a bad beat at the tables and I am working on that. And that is why I think trading is so much easier than poker - the element of luck. IMO there is no luck in trading - you are right or wrong; in poker, you can have the absolute stone cold nuts after the flop and turn... and still lose on the river.

 

Don references the Tao of Poker and there are so many trading ideas there as well.... Good book for 10 bucks.

 

James (soultrader) used to play poker professionally if memory serves and I'm sure he's got some stories to share.

[Frank 10]

good post brownsfan -- sounds like we lead parallel lives...

 

next thought:

 

I usually play no-limit hold 'em -- in this game one of the worst things you can do is 'trap yourself' --- a very common mistake by beginning players. this is when you overplay your hand and put a ton of money into the pot thinking you are ahead in the hand --- while instead you are just doing all this aggressive betting for someone else's well-laid trap.

 

In trading, this is kind of like trading large size without a great set-up, you are just likely trapping yourself by trading a size you will not be able to 'manage well' -- ie, you will sometimes panic or set a stop too tight in fear of taking a loss. these times that you do not play 'your hand' strongly' are just padding the pockets of other sharks at the table (screen).

 

in poker and in trading -- you need to play at a level where you know you can play confidently --- without fear and without recklessness.

[Frank 10]

<<And that is why I think trading is so much easier than poker - the element of luck. >>

 

it is the luck factor that keeps poker games going -- and the reason why 'chess rooms' aren't big --- in chess, there is no luck. in poker, the luck factor makes bad plays work in the short-run -- and encourages bad players to keep playing. this clearly occurs in trading, imo.

 

so I don't see poker and trading as so diff't in this regard.

 

In poker, one of the biggest mistakes you can make is passing up the chance to win a big pot, even when %-wise, you are an underdog. if the payoff is big, many times you need to just put your money in the pot -- passing up the small chance of winning a large pot is often giving too much away.

 

In trading, you never really know the precise odds like you might in poker -- because poker has mathematical rules and trading does not. But the concept of 'pot equity' still applies -- if you estimate you have a ~70% chance to make $500 on a trade and a ~30% chance to lose $500.. your 'equity' is $350 - $150 or +$200. You are going to lose -$500 a bunch of times and go on some bad losing streaks even if these probability estimates are correct.

 

this brings to another interesting connection between good poker playing and trading.

 

in poker, say you have a Queen high flush draw on the flop. you know you hold 2 clubs and the board has 2 clubs -- you know that there are 13 clubs in the deck and you can see 5 total card (3 on the flop and 2 in your hand). so you know there are 9 clubs left (13 minus the 4 you can see) and there are 47 unseen cards left (52 cards in deck minus the 5 you see -- 3 on flop, 2 in hand).

 

In this situation, you can say you have a 9 in 47 chance to make a flush on the next card and win the hand -- and then you have another 9 in 46 chance on the following card. But good poker means being a good estimator[1] --- and there is a chance that you opponent has a bigger flush draw --- or that he has a set and can 'fill up' to a full house if the board pairs -- so even if you make your flush, you are going to lose a LOT of money when this happens. There is also a small chance he holds the naked Ace of clubs too and that is using up one of your 'outs' and therefore knows YOU don't have the nut flush draw and can use this info to bully you. All these factors together mean you need to be a little more conservative than just saying 9 in 47 chance. So as a good player, you would 'discount' the outs -- say to 8 in 47. Now you can see his bet size and make a judgment whether its worth calling, folding or raising based on this 'starting point' of 8 in 47. (there is also a chance you make a pair on the next card -- in which case you may also win the pot -- but you want to err on side of conservatism).

 

In trading, this is similar. If you think ES will trade to 840 and its 832, you have to think about all the same types of things --- what if it trades to 839.50 and your limits don't fill -- what if it just goes dead for an hour and then goes to 840 -- will you still be able to participate? What if it trades up for a few points but then spikes lower before continuing to 840. All these factors mean you should probably be a bit conservative and at least take partial profits along the way. What differentiates a top poker player from a medicore one is when they can make a good call on the end (a situation that did not work out great in terms of the cards that were 'likely' -- but you still made good money) or a good 'laydown' (a situation where things kind of started to 'line-up' for you but you just didn't quite get there and accept the fact that its low odds to win at that point).

 

 

[1] "poker requires you to estimate over and over. In many ways, being a good poker player means being a good estimator. You have to know what is important to estimate, and you have to come up with reliable numbers..... If you consistently make good estimates, you'll win"

 

'Professional No Limit Hold 'Em' by Flynn, Mehta and Miller

Two Plus Two Publishing

Edited April 4, 2009 by Frank

[mike21 10]

Money management is the key to sucess in both poker and trading. The good poker player wins the big pots. The bad player wins the small pots.

 

The professional poker player will set a trap for the amateur just as the 'smart money' manipulates the 'dump money' in trading.

 

~Mike

[SwingTradinJay 10]

Love poker personally...hate the bad beats on the river :\ So annoying!

I love checking on big hands, then re-reaise slowly and put them all in suddenly

[brownsfan019 17]

Frank - I see what you are saying, guess I just see it through different glasses. I think luck is very evident in poker; whereas it's not so obvious (it at all) in trading. I mean - how do you define luck in trading? You got lucky b/c Obama said something in a press conference that set a trade in your direction? Perhaps. But something like that happens so little that it's a non-factor IMO. Other than the unexpected news announcement, not sure what other luck exists in trading.

[brownsfan019 17]

Love poker personally...hate the bad beats on the river :\ So annoying!

I love checking on big hands, then re-reaise slowly and put them all in suddenly

 

Any observant player will pick up on that real quick. The check, min-raise is a very obvious play.

 

With that said, you can use that against players that are aware of that play.

[atto 20]

I love checking on big hands, then re-reaise slowly and put them all in suddenly

Not only will most decent players catch on quickly (or infer that you might make such a move), the move itself rarely maximizes estimated value. Let's look at three possible situations:

• What if your opponent has a weak hand? Your check then small raise made it very cheap for him to stay in and hit something that could beat you. A loose aggressive player will call those all day, and constantly give you "bad beats". When you raise all in, they will only call if they hit something. Even if they know you're bluffing, if they have air, they can't call. They're hardly committed, and can pull out easily.
  
• What if your opponent has a mediocre hand? Your check, small raise again makes it cheap to stay in. The mid pair can cheaply turn into trips, the double draw can cheaply draw. Then, your all in makes it easy again. If they missed or didn't improve, they likely won't call. Your absolute best case if a mediocre hand calling, thinking you're bluffing. If they did hit, however, you're usually beat.
  
• Finally, what if you're against a strong hand (either one that beats you or not)? By giving cheap cards and the lead, you're letting them take control of the aggression, putting you into a possible "all in call" situation (in which case: how good really is your hand?).
  

 

In poker and trading, you want to maximize EV. With the worst hand, you want a premature fold. With the best, you want as much from others as possible. Sure, sometimes playing tricky is necessary, but this move is quite well known and probably doesn't maximize the outcome you want.

[brownsfan019 17]

Nice post atto. The really only time I will consider a slow play is when I have the stone cold nuts and that's about it. I've been burned too many times by doing what you illustrated - make small bets and then let a guy walk right into his straight draw or some weird 2 pair or something.

 

I pretty much bet it if I got it now - whether that's top pair or the nuts.

 

The one thing I have found in poker that helps tremendously (and what I read in a few poker books) is trying to do the same thing every time - whether I have AA preflop or the nuts on the flop - put in a regular, standard raise/bet regardless of how strong the hand is. It's a great way to get paid when you do have AA or the nuts on the flop. Basically, I'll raise to XYZ w/ whatever holding I have and that way the other players don't know if I am making a move with 4,5 suited or AA. Too many only put in big raises with AA or KK and it's transparent. In the end, AA or KK is just a pair. That's it. Can't fall in love w/ 1 pair. (learned that the hard way too).

 

Last weekend I played in a local charity thing (cash games) and the last 2 nights there I took the philosophy of raise or fold preflop. The previous 2 nights I had gotten too soft on my preflop betting/calling and it cost me. The last 2 nights I did the bet or fold preflop option and I got paid off nicely both nights as I heard throughout the nights 'no way you have a hand again' or 'got tired of you rereasing me'...

 

The other thing to take from that is another idea throughout poker books - when you are the one doing the betting, you can win 2 ways: 1) they fold 2) you get called and have a better hand. If you call, the only way to win is having a better hand.

 

I'm a novice poker player now since casinos are not local to me, so only get to play every so often. Seems that some ideas I read in the books take a while to stick. :doh:

[SwingTradinJay 10]

Any observant player will pick up on that real quick. The check, min-raise is a very obvious play.

 

With that said, you can use that against players that are aware of that play.

 

 

You would be surprised man, a lot of people fall right into it, because they think they can buy the pot and force you to fold. Aggression/ego/chip lead plays into it. Also, when you actually have something, people may think your bets are overly strong, AKA bluffing...it becomes so distorted lol...especially if you tell them out loud you bluffed last hand, which is a total lie, then their just like wtf is going on ? lol.

 

It even happens to the pros...I've seen someone try to buy a pot to get re-raised all in. It leads to a nasty fold or wipe out. You chose the part you play, im always passive and folding, slow playing, then sometimes mixing it up with 100% bluffs.

 

sure, the opponent could turn or river something...there's risk in any poker situation. but I would much rather slow play a good hand than suddenly all in, because the opponent will just fold it most likely...it's really only for good hands, in which you don't want to set off "alerts"

 

ive seen perfectly good str8's on the flop, all-in...well ofcourse you fold, they gave away their cards via betting tell. id say bounce between slow and aggressive play.

 

believe it or not, i've checked trip aces and turned into quads...I took em to the cleaners alright :)

 

I remember listening to a pro on WSOP or something, saying you should LOOK for every reason to fold. Always assume the worst basically.

[nickgogerty 10]

you may be interested in using a fractional kelly formula. Quantitative Trading, By Ernest P. Chan: An Extremely Useful Book -- Seeking Alpha

[natedredd10 10]

Frank - I see what you are saying, guess I just see it through different glasses. I think luck is very evident in poker; whereas it's not so obvious (it at all) in trading. I mean - how do you define luck in trading?

 

That is a very interesting question.

I think as traders we are all biased against the concept of luck in trading, just because there is so much data out there that when something doesn't work we can fall back on lack of analysis..But we also of course know its impossible to analize so much data so maybe noise is a better term to refer to luck in trading. I soppose thats how I view luck in trading, its not the same random/coin flip/shuffled deck randomness of poker, but since all the variables in a trade are too much to quantify a portion of the equity in a trade may as well be seen as being based on luck/randomness.

 

I highly recommend Bill Chen(a quant modeller at a hedge fund and sick poker player) Mathematics of Poker. You don't have to bother much with the math to get the ideas. The last chapters on risk of ruin and bankroll management are absolutely superb though.

[natedredd10 10]

The one thing I have found in poker that helps tremendously (and what I read in a few poker books) is trying to do the same thing every time

 

There are actually good game theoretic underpinnings for this.

I only use two opening raises, 3X the big blind in earlier position and 3.5x BB from the highjack,cutoff and button. Limping is just senseless because you are giving the big blind a good chance to see a free flop and increasing the chance of a multiway pot.

I'm trying to get into then also only using the same % of pot bets on the remaining streets to hide any information gained from my betting. I believe this is not optimal play but should be good enough at lower limits.

The biggest thing that has helped my game lately is nailing down your range cold. I play these cards and I dont play these other cards. Then when you get a hand your either thinking play or you are thinking bluff, and not should I or should I not play this.

Tight aggressive is certainly the way to go at lower limits but can easily be exploited at higher limits by looser players but most players suck at the low limits so straight forward strategy works to profit from their mistakes.

 

I think these series of posts are actually vastly superiour to 99% of poker books. Poker books are just getting kind of long in tooth vs modern playing.

****Concept of the Week" Schedule and Table of Contents**** - Micro Stakes Full Ring Games - Micro Stakes Poker Strategy Forum

[Frank 10]

in poker, luck is really the same thing as 'variance'. but this is what the concept of 'an overlay' is --- do the odds justify a bet/raise/call, given your estimate of the final pot size and your players propensity to fold etc..? you have to factor many things in beyond just the mathematics of the cards.

 

in trading, people get confused and mistake 'variance' for skill. but fact is, no matter if you call it variance or luck -- it exists.

 

I have found that thinking about reward/risk is the way to go in trading (and poker). Will I be paid off if I get this trade right? If there isn't much profit available, then its ok to just not play -- the 'ante' in trading is opportunity cost of working at a 'real job'. But the pot sizes in trading are very large in some environments -- as is the risk.

 

So to me, I spend a lot of time thinking about and analyzing whether the environment supports 'entering the pot' -- or just sitting out and waiting for a better spot.

 

frank

[natedredd10 10]

in poker, luck is really the same thing as 'variance'. but this is what the concept of 'an overlay' is --- do the odds justify a bet/raise/call, given your estimate of the final pot size and your players propensity to fold etc..? you have to factor many things in beyond just the mathematics of the cards.

 

in trading, people get confused and mistake 'variance' for skill. but fact is, no matter if you call it variance or luck -- it exists.

 

Well I think it first helps in this discussion to not get confused by poker math as just being 1+1=2... pot/implied odds == x then I do y as a strategy...Poker is ripe for game theory experiments and just like the markets, with the amount of money on the line people are going to bust their ass to find optimal strategies and theory. No limit holdem is a finite game that we simply do not have the computing power currently to solve, which is why its interesting vs something like chess.

Fold equity is certainly a huge part of the game..to me part of what makes low limit poker interesting is that since the villain is not thinking about what you are thinking, optimal strategies against better players become sub optimal vs unthinking players.

Thats why the guy above who loves to slow play is correct since he is probly playing against unthinking players who are not going to fold or bother with a read on what he is thinking if they bet. Or more specific he is correct until the opponents he is playing changes and gets better.

Calling variance in poker, luck in trading to me still misses something huge. If all traders place trades actually rolling dice that would be true. 1 - short x amount, 2 - short y amount, 3 short z amount, 4 long x mount, 5 long y amount, 6 long z amount.

 

Keynes analogy on markets and beauty contests to me is a great model. No one votes for the most beautiful woman in the contest on what they think, they vote based on who they think the other judges will vote for as most beautiful and act accordingly.

Mis and flat out wrong information about the other judges voting habits though creates "noise".

Which to me is why you almost can't seperate the idea of "luck" and "noise" when it comes to markets.

[Frank 10]

got to mention this:

 

 

Rush Poker ? Play The World's Fastest Poker Game - Full Tilt Poker

[natedredd10 10]

got to mention this:

 

 

Rush Poker ? Play The World's Fastest Poker Game - Full Tilt Poker

 

I haven't bothered with Rush poker, to me it seems kind of stupid. From what I've read so far, the way to play this game is basically jam or fold preflop. I believe they started this to try to combat HUDs and tracking software but the tracking software has already adjusted itself to include rush...

Its cool full tilt tries new things, like their HU game but i doubt these things will catch on much.

[Frank 10]

well, I am thinking more along the lines of --- it was very easy for a bunch of kids to cheat before -- you get a bunch of friends to sit at the same table, start an instant messaging conference and state the cards they hold. wouldn't it be nice to know an extra 10 cards each hand --- ie, you see 2 aces are dead and you hold Kings or Queens? or that a 7 is dead and you hold 77?

 

this innovation just squashes that if you are in a 400 or 800 player pool.

 

the minimum buy-in is still healthy vs the blinds -- so you can't jam or fold all that easily. not to mention, you can play tons more hands without having to multi-table and make decisions at the same exact time in totally diff't situations.

 

I think rush poker is quite good -- though I do prefer live poker still.

[zdo 20]

Gambling Study: How Winning at Poker Causes Greater Risk - TIME

[james_gsx 16]

Tight aggressive is certainly the way to go at lower limits but can easily be exploited at higher limits by looser players but most players suck at the low limits so straight forward strategy works to profit from their mistakes.

 

I think these series of posts are actually vastly superiour to 99% of poker books. Poker books are just getting kind of long in tooth vs modern playing.

****Concept of the Week" Schedule and Table of Contents**** - Micro Stakes Full Ring Games - Micro Stakes Poker Strategy Forum

 

Nate - have you read Aaron Browns book? The Poker Face of Wall Street. He posts over at NP, so I'm curious if you've seen it yet. Amazon just lowered the price to something like $5.

 

He basically said the exact opposite of BrownsFan. If you do the same thing every time, then you will become predictable and be exploited. But he also only plays high stakes game where the players are constant. At low limits, people generally aren't paying attention and new players come and go - which I guess could make a case for having a consistent strategy for your own sake.

 

It's an interesting book by a very good trader/poker player if anyone is interested.

[rxs0005 10]

Frank

 

i love hold em and play online daily on pokerstars and bodog i love trading too

 

and yes there is huge similarities between poker and trading and i am sure many have gone through them in this thread but what i fundamentally believe in these two games is

 

" you play to win chips / money "

 

what i am essentially saying is there is no need to play every hand but when u get the bullets or a full house or a monster hand on the flop you got to ride it out and make the most of it

 

other times lesson learnt the hard way is very simple BE PATIENT it will come to u !

 

 

have a great week traders and poker aficionados

 

cheers

 

rxs0005