Trade Like a Professional Poker Player

01/15/2010 12:01 am EST


The similarities between poker and trading have been mentioned countless times by people who excel at both—and with valid reason. Both are essentially an effort in speculation where risk management and taking advantage of an edge will have a long-term positive expectancy. Sounds complicated, but basically, pros will trade or play poker only because they have a statistical edge in the long run. However, there is another commonality between successful poker players and successful traders that isn't often discussed. In fact, you can argue that the vast majority of successful individuals in any business share this trait. Quite simply, they don't throw away their money.

Professional poker players will not play too many hands where the odds are not in their favor. In fact, they will only play a subpar hand when position or pot odds dictate. Pro poker also players know how to walk away from a hand if they are confident it is a loser, even if they already have a substantial amount in the pot. It makes no sense making a call at the river where you are beat just because you have money invested in the pot. Every move is a calculated risk based on odds and statistical probability. By not throwing away their money, pro poker players ensure they have enough ammunition to make a bet count when the odds are in their favor.

So how does this translate to trading? There are several ways for a trader to throw away money if they are not careful. To be successful in trading, you must treat it as a business. Trading is not a hobby. You trade to make money, and if you are trading for any other reason than that, chances are that you will not be successful in the long run. Because it is a business, you must examine all your expenses and revenue streams, much like you would any other business.

What are some of the areas a trader needs to watch?

Commissions: Traders need to understand their account size, frequency of trading, etc., and then choose a commission structure that will be most efficient. If you are trading small lots and not paying per-share pricing, you are throwing away a lot of money. Don't stop at commissions either. Look to see if you broker provides any rebates based on order routing. Check your margin rates. It may not sound like much to save a few bucks on a trade, but multiply it over a year and you will be surprised at the impact to the bottom line.

Other Expenses: Examine what your software packages are costing you. I have certain things I can't live without, such as Worden's Telechart. However, I don't pay for anything else if there are other free options or if it doesn't help me in a substantial manner. Get rid of anything that doesn't help bring money into your business. Would you pay $50 a month in advertising for a business if it didn't bring in any business? Drop anything that isn't necessary. For my style of trading, paying for a news feed, earnings calendars, or a financial newspaper would be a waste of money. I have access to news from my trading platform and use free Web sites for the rest. Figure out what is truly valuable to you and cut out the rest.

Stop Taking Subpar Setups: Overtrading is one of the biggest problems traders have. Often, when I am trading poorly, I go back and realize that I am trading when I shouldn't be. Figure out what type of trader you are, and stick to it. If you stop and look at the successful traders in Stocktwits or Twitter as an example, notice how they stick to a certain style. It is very difficult to trade off of Fibonacci retraces one week, and then buy breakouts the next, only to fade breakouts a week later. Find your bread and butter trade, and stick to it. By reducing the trades you take, you can cut costs by improving the quality of your setups and also by reducing commissions.

Make More Money Than You Lose: That sounds like a statement from Captain Obvious, but here is what I mean. Think of each trade as a transaction for your business. There will be debits, and there will be credits. In fact, they will likely be 50/50. So, in order to make money, your credits need to be larger, on average, than your debits. If you are risking $500 per trade, then you should try to target at least twice that on a winning trade, if not more. This way, even if you lose more than half the time, your account will still appreciate.

Cut Your Losses: If you own a laundromat and you have a machine that is leaking water and causing your water bill to be out of control, would you plug the leak? Then take a loss when a trade fails. If your reasoning for entering a trade is not valid anymore, then simply get out. You can always get back in, and avoiding a huge hit is paramount.

Cut Your Losses: It's so important that I listed it twice. Taking a loss is the single most important trait in a successful trader.

There are many hurdles a trader must overcome to be successful, so try not to handicap yourself by throwing away money needlessly. If you treat it as a business and shore up expenses, you might be surprised by the impact to your bottom line. If you have other examples I am missing, feel free to comment.

By Trader Joey, trader and blogger, Downtowntrader Blog

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