I have recently been getting into playing poker. Having always had an interest in the game, I played a lot whilst in Thailand a few years ago. It is only now that I am starting to see poker in a new light, after finding out its link with trading through my own research.
Most of us know how to play poker. And most of us know the similarities between poker and trading. However, it isn’t commonly known just how intertwined they are. Did you know that most of the top hedge fund managers were (with many still are) keen poker players?
Now many people see poker as gambling, due to the perceived ‘luck’ involved. At a glance, it would appear that way. However, only when understanding what it takes to be successful in either trading or poker, do you realise that the notion of either being gambling is a myth.
Let me first start off by asking you; how come the same people tend to be in the finals of professional Poker tournaments?
If it was gambling, then surely, we would see different people every year.
The same question can also be applied to the financial markets; how come it tends to be the same minority of people who make the majority of money in the markets?
It is worth asking these questions to anyone who holds this narrative as it shows just how far from the truth they are. Just because the outcome is not predetermined, does not make it gambling. The myth of trading/poker is gambling only exists due to a lack of understanding of probability, mindset, risk, and reward.
Trader / Poker
Jim Simons – Founder of Renaissance Technologies played poker seriously whilst at MIT, even using some of the concepts to dictate early trading models.
Carl Icahn – Founder of Icahn Partners funding his initial investments using his winnings of over $4000 playing poker in the US Army.
Steve Cohen – Founder of Point72 Asset Management stated he used to ‘win big’ playing all-night poker games with his high school buddies.
There is a long list of many others, I have chosen these as examples because these are three of the most well-known fund managers, all with net worths of $10billion+.
Why do people enjoy it and why does it attract finance professionals?
The main reason why people enjoy playing poker is the combination of the events in the game, being in a player’s control, but also outside of their control, with the hopes of earning a financial reward. The mental challenge of going up against multiple different players makes it exciting and addictive.
The balance between making informed bets with undetermined outcomes, managing risk, and reading opponents makes it particularly challenging. As also with trading, only the individuals who can manage these factors to the highest degree can consistently generate a profit when playing poker.
What tends to make a good poker player, tends to make a good trader (vice-versa). Now let’s break down the similarities between the two.
Trading and Poker Similarities
The first similarity between trading and poker is the management of risk. Both require a detachment of money and monitoring risk to reward at all times. Effective traders/poker players are able to cut losses and hold onto winners, whilst maintaining protection of their total capital. The objective is to be in the game long enough to capture high-probability opportunities.
The other major similarity between the two is the influence of probability in determining the success of a trade idea or hand of cards. The study of mathematics is prominent in both due to how important probability is. Every participant in both has to always understand the likelihood of a particular scenario playing out, selecting a predetermined risk amount for each opportunity, in order to be successful in the field. This is the edge they have over others.
The final similarity is the mindset required to earn a profit consistently. A detachment from the money, allowing probability and risk-to-reward to play out is essential. A good trader/poker player will cut losses early, hold onto winning opportunities and avoid tilt. They manage their emotions to avoid allowing negative thoughts to affect decision-making.
Differences between the two
As established, there are major similarities between poker and trading. However, there are some key differences to consider.
The main difference between poker and trading is the influence of another person. Although the market is made up of millions of people from all over the world, with all different backgrounds and experience levels, you do not interact with them in the same way. In poker, a common phrase is ‘play the man’. The ability to see the other player in front of you can open up the door to a whole new skill set.
Many poker players will study human psychology and body language to attempt to understand their opponents further. This is less prominent in online poker as participants are behind a screen – but the skillset of guessing your opponent’s hand is an important area of the game.
If you ever watch professional poker players, you can see that many of them have iradicated their cues or hints by monitoring body language. In my experience, reading body language is far more effective among beginner players.
This links to bluffing as some players can try to win a hand with poor cards. Although you can get a pump and dump scheme in the markets, you cannot bluff the market in the same way. You are trading with/against other unknown retail and institutional investors. If you have a bad hand/ trading opportunity, you cannot just bluff your way to trading success.
Now, I have not written this so that you drop everything and start playing poker. Or that if you are a successful poker player, you will automatically be a top trader. The purpose of this article is to show you just how closely linked the two are. Many of the lessons that can be learned from playing poker can be applied to your own trading, just as many of the top hedge fund managers, like so and so have done in their careers.
Many of the principles applied in poker, such as probability, mindset, risk, and reward, are essential to trading success. If we fully understand these concepts and apply them over a consistent basis, we can achieve profitability in the financial markets.