Submitted by Michael Radkay
Last weekend I went to a friend’s house for a friendly night of poker. Yeah right, and Clinton didn’t inhale… When you compete, you want to win, period! Your opponent wants your chips and you want theirs. Pretty simple game of me vs. them. In the end it was a friendly game and we had a blast!! The timing of our game was perfect as they just crowned the 2009 World Series of Poker (WSP) Champion. All of this poker in the air left me thinking about how people risk in an emotional state. The types of players in our friendly game and even watching the actions of the WSP players weren’t much different. Some players were extremely patient and methodical and some played practically every hand and some just flat out gambled. It seems that the extremely patient and methodical player always wins. Now I’m not suggesting that the WSP Champion winner didn’t run into some scuffles and catch some lucky cards, but every time the winner got involved he had something decent to use as the hand unfolded. He folded his mediocre hands, when pressed, but when he had a strong hand, he fired at will and didn’t back down. A heck of a lot of maturity as the youngest player ever to win in a field that started with over 6000 players. Well done!!
When we risk money, whether investing in stocks, real estate, bonds, futures, forex or even poker, you go in knowing that you could lose big or win big. I see a lot of similarities between professional poker players and professional traders. The strategy behind riding a winning hand or knowing when to fold ‘em is where the top professionals in all risk endeavors excel.
For those of you that want to trade the financial markets but seem to fall short every time can find some clues by watching the actions of how players risk their money in poker tournaments. The answer lies within how much is needed to play and 3 other areas: 1. the entry, 2. how you play when you are in the game and 3. the exit.
1. The Entry (deciding to get involved): In the popular game of Texas Hold Em you get dealt two starting cards. The best two cards to start with are aces or a “Pair of Bullets”. You should be fairly comfortable to play this hand. Of course there is no guarantee of winning, because you can then use the best 3 of the next 5 cards that are revealed as the hand is played out. For me trading is much the same way. I use 5 total indicators including 2 initial key reference points that let me know which way I want to play (long-buy first or short-sell first). If prices are above the previous session close and above the previous session 50% mark, I favor long first and favor short first when prices are below my indicators. Simply this is my version of a “Pair of Bullets.
2. In the game: You place your bets based upon your cards’ strength and you can fold at anytime if your hand doesn’t improve. Remember there are generally 3 types of players, the patient and methodical, those that play every hand and those that flat out gamble. Which one are you? Trading is much the same way. When I am in a trade, long or short, with my “Pair of Bullets”, how is price action unfolding? Is my hand improving or getting worse? As a screen trader I have learned to be patient and methodical.
3. The Exit: The exit in both arenas is based primarily on fear and greed. As your position in the game improves greed starts to consume you. As your position in the game gets worse, fear starts to consume you. How much is enough? Of course we want to hit it out of the park every time, but experience tells us that good things don’t always last and bad things always turn back around. This experience will hopefully keep a balance between our fear and greed. In order to control our emotions in the heat of battle, it becomes extremely important to map out your exit strategy before you even dip your toe in the water. Practicing and visualizing scenarios and how to respond though dress rehearsals prepare us for all situations. Know your plan backwards and forwards so that you can react on instincts rather than emotion.
Remember, while trading has its similarities to gambling, it is a profession used to protect many industries through hedging and is regarded as one of the largest engines that drive capitalism. Treat the markets with respect, play wisely and you will enjoy the rewards.
Prosperity is at your fingertips. Go Grab It!!