Poker and Trading Hazards

It has scientifically been estimated that it takes 10 000 hours (4 years, 8 hours a day) to get really good at anything.

Hazard: No risk, no return

Attachment: Table 1.png
Attachment: Table 2.png

Step 1: Find your niche (i.e. best winning situation form above). If you cannot win at your niche, you will lose at any other combination. A niche is some combination of the above which gives you the best chance of success. Take note: We are not even talking about your method of playing / trading employed.

Step 2: Money Management. One of the hidden purposes of proper money management is to give you an indication over time if you can play and win at your ‘niche’ game. If you cannot, then money management will not save you, it will just prolong the inevitable.
The purpose of money management is also to calculate the optimum amount you should take from your bankroll to a table/tournament. The optimal amount is the amount which will let your bankroll grow the fastest with a given level of risk. I.e. pros know some of them only have a maximum of 2% advantage over another pro. This means there is a huge level of risk of luck involved most of the time.

Chris Ferguson suggests, as a rule of thumb, to take only 5% of your bankroll to a cash game or a sit and go. He also suggest, as a rule of thumb, to only take 2% of your bankroll to a multitable tournament. Chris Ferguson’s estimates are very close to calculations done by traders and mathematicians on calculating the optimum amount to the market/tables for the quickest reward taking into account the risk associated with bad luck streaks.

Discipline means sticking to Step 2.

Mathematics of Kelly Criteria
(for calculating optimal risk taking into account reward/risk)

1) Trading example:
Our probability of winning each time is 60%. Thus Win probability is 0,6. Each time we win we get 150% of our trade size. Every time we lose, we lose 100% of our trade size. This gives a win/loss ratio of 1,5. Then, use the formula:

K=W-((1-W)/(w/l))

where W is the percentage of wins (i.e. Win probability), w is the average dollar win and l is the average dollar loss (i.e. win/loss ratio).

As in your optimal f calculation:

0.6 -((1-0.6)/(1.5/1)) = .33

Now, trade 33% of your bankroll (i.e. R33 333 of a R100 000 bankroll) on a trade that has a probability of 60% and a return of 150% for each winning trade.


2) Poker example (tournament play):
180 entrants, you assume you are better than average. You assume you have 1/33 chance of winning the tournament, i.e. 3,0%. If you win you will get 25% of the total winnings. That means 45 times your buy-in. We ignore getting in the money and for this example view ‘getting in the money’ as just a bonus.
Calculating the Kelly value, you get that you must put only 1% of your bankroll on the line in each tournament.

Remember, the 1/33 chance needs to be established first. This can quite some time before you have a ‘true’ approximation. Else, you must make the approximation by estimation and feel. The more accurate you can estimate your chances, the more accurate answer the Kelly criterion will provide.

As you will find out by putting different values in the Kelly Value is that if the Kelly value < 0 it means you cannot win over the long term and your ‘niche’ game is not good enough. You will have to change your style/method or stop. Try it for roulette calculations and you should get a negative value (not taking card counting into account of cause).

Please comment on this, I am sure we can improve on these initial thoughts.

Add-on:
“A contrarian investor focuses not only on the general sentiment, but more
importantly on how that sentiment can lead to disconnects between the
fundamentals and market expectations.
“To continue with the horse- racing theme … Steven Crist, for many years the
New York Times reporter covering horse racing, contributed a chapter to a book
called Bet with the Best in which he wrote: ‘The issue is not which horse is the
most likely winner, but which horse is offering odds that exceed its chance of
victory …. This may sound elementary, and many players may think that they are
following this principle, but in truth few actually do. Under this mind- set,
everything but the odds fades from view. There is no such thing as “liking” a
horse to win a race, only an attractive discrepancy between his chances and his
price.’ The successful hedge fund manager, Michael Steinhardt, shared a very
similar view in his autobiography, when he wrote: ‘I defined variant perception as
holding a well-founded view that was meaningfully different from the market
consensus …. Understanding market expectation was at least as important as,
and often different from, the fundamental knowledge.’
“Now ask yourself, honestly, how clearly do you distinguish between
fundamentals and expectations? If you’re like most people, not very clearly.

“Psychologist Robert Zajonc, sums it up pretty well when he says: ‘We
sometimes delude ourselves that we proceed in a rational manner and weigh all
of the pros and cons of various alternatives. But this is seldom the case. Quite
often “I decided in favour of X” is no more than “I liked X”.… We buy the cars we
“like”, choose the jobs and houses we find “attractive”, and then justify these
choices by various reasons. Moreover, what we like is heavily influenced by what
other people like. Successful contrarian investing isn’t about going against the
grain per se, it’s about exploiting expectation gaps.”

Great post i must say.. infact i'm a poker player and also a trader. and yes... both of this are linked somehow... like using the MM.. by applying MM, it is to prolong your standing in this battlefield... it is one of the easiest but the hardest to master.. why? becoz of emotional fear and greed... if this two can be eliminate and equip yourself with a good playing style or trading system, you will be reaching to the end of the rainbow soon...

"10,000 hours of training, according to Malcolm Gladwell’s book Outliers. Gladwell based this assertion on the work of Anders Ericsson, who studied classical violinists and found that, in every case, it had taken a regimen of 2-3 hours a day for 10 years to develop their abilities. Later research by Ericsson and others confirmed similar results in other fields." -- from here .

Only, I've always thought the approach mattered. Wenger and Poe's Einstein Factor noted a story about a group of young violin students from the mid-19th century who learned to play like experts within several months.
Plus, there's various accelerated learnings methods available today, plus Eastern meditation etc., that could maybe remove this barrier.

FxFact, interesting post - I like the comparison topics in your attachment.

However, IMO pro Blackjack (card counting) aligns itself more closely to trading than Poker does. (Having said that, I'm not really a Poker guru).

Just off the top of my head, some reasons why Poker differs from trading:

 

1. Poker involves outplaying and outwitting multiple human opponents, and one benefits by adapting one's approach (e.g. tight play, loose play) by reading opponents' playing styles. Trading and Blackjack both operate according to fixed rules (more finite, predictable 'gameplay'), and you're effectively playing against a single, unflinching opponent, i.e. the market, or the 'house' (dealer).
   
2. Skilful bluffing can give you a strategic advantage in Poker. It's impossible to bluff the market, or the Blackjack dealer. In Poker, psychology includes the art outwitting multiple human opponents. In trading and Blackjack, the only psychological 'enemy' is oneself.
   
3. Poker odds can be precisely calculated. Not so with trading. (Admittedly any analogy between trading and Blackjack falls down here, too).
   
4. No Limit Holdem seems to encourage a complete lack of MM. You see the top players going "all in" when they have a < 100% probablility of winning the pot (that's assuming that they're < 100% certain as to what cards their opponent(s) are holding - a safe assumption, since many players who go "all in", lose). Now that's the equivalent of a trader risking his entire account on a single trade. Likewise, no Blackjack pro ever goes "all in", and for the same reason.
   
5. No pro trader seriously considers using the Kelly formula; trading MM is (or should) prioritize account preservation. Many Blackjack pros use very similar MM to traders, i.e. low percent fixed fractional sizing.
   
6. Blackjack and trading are exercises in attrition, i.e. gaining an ascendancy through the repeated, consistent application of a small edge; profit is the result of a great many small wins (exceeding a great many small losses). Poker players tend to employ a more 'expansive' approach: pot sizes can fluctuate significantly throughout a session.

Just my two chips worth.

David

Exactly, and very articulately stated. But the problem is: how does one apply this to trading, where the odds can not be precisely calculated?

Anyway, I enjoyed your post - very thought-provoking. Thanks for sharing.

I learned to:

cut losses quick and keep them small

let winners ride.

Forex moves can be really big like today when I was trading the gbpusd. By not letting losses exceed 20 pips, I can make up a loss a lot easier and quicker then if I let losses get to 50 or more pips.

I don't know what the odds are but I do know I wouldn't want to have been short gbpusd when it took off. That would have been a monster of a loss - lol!

The way I figure, if I get a monster trade going my way, I get ahead. I don't know when it will happen, so I must "play each hand". I'll throw in the cards and take my lumps if it doesn't go my way but sooner or later it will. Small, incremental gains add to my pile of chips each day.