Friday 31 August 2012

When the chips are down, the trades are up!

by Daniel Hearn
poker, trading, teen economist, economics for teens, economics for teenagers, financial markets, stocks, shares, traders

Poker – a game of luck where the player with the strongest hand always wins, right? Well, not always and in fact it can be very rare that the strongest hand actually does win! So surely, this doesn’t relate to modern day trading where other peoples’ money is invested. You’d be surprised! Poker (a bluffing game of luck) is seen by many as having direct links with trading…


Many ex-poker players have changed their profession to become traders and vice versa. This is a prime example of the extent to which correlations between the two professions emerge. The similarities seem endless – the whole psyches of the two professions are very much interlinked. Despite being dubbed as a gambling game by casinos, this is not the case with poker. Poker can in fact be seen as a player v player game rather than against the house or the cards themselves. This means that the people who keep cool under pressure and can maintain a “poker” face as it were (bluffing) will often win, rather than the luckiest person with the best hand! This same behaviour can be applied to trading as often people invest in what other people think is going to do well, rather than what seems to be the strongest position. Therefore, those who invest in the “best” positions, as it were, might actually lose ground on their investment, while those investing in “poor” positions (which the majority are investing in) could actually profit through this fake presentation of their position as doing well. (There are, of course, occurrences where the best positions do win, just as the best hands in poker sometimes win). However, to keep up this perceived representation of their position, the trader must remain calm, with a cool head and be able to maintain a long term bluff – exactly what poker players train to do.


Furthermore, poker players must manage their money (chips in their case) effectively so as not to lose it all on one hand due to a rush of blood. By managing and placing restraints on the amount they are willing to bet on a certain hand, the poker player is applying a risk management strategy to his game and this makes it more sustainable and less likely that they will be wiped out in a matter of moments. Similarly, many traders argue that the hardest and most important skill to have as a trader is risk management. Traders, especially those involved in volatile markets, will often cap the amount they are willing to invest in a single position to minimise any potential losses, while keeping the return high enough to be sustainable. This is exactly the same as poker players managing their chips and thus shows the familiarity between the two: a shared mind-set is evident between them.


poker, trading, economics for teens, economics for teenagers, teenage economist, teen economist



Even the apparent differences can be turned into similarities. Surely in trading, the traders have an influence over how the position will do, but not in poker. However, this is not the case; the opposite is true! In fact, in poker, even if you do not have the power to control the hand you get, you can assess the hand your opponents have through their physical reactions, the way they play and your knowledge of their personalities. In this respect it just confirms that poker and trading are both centred around reading other peoples’ reactions and predicting their future actions.



This vital skillset, which is shared by the two professions, allows easy movement between the two, hence those familiar with poker will often do well at trading and vice versa. An example of a shift between the two professions can be seen when looking at Andrew Frankenberger, who switched from being a derivatives trader to being a poker player. Frankenberger openly admits that being a former trader has, without a doubt, helped enhance his poker game play. In an interview with Bloomberg, Frankenberger revealed that the most important skill that he transferred from being a derivatives trader was that of risk management. Also, he believes that working in the two professions has helped him cope under pressure and stress and that he has come to thrive off them.


This comparison of the two professions exposes the truth of trading and challenges some of the myths about how trading is simply about investing in the “best position”. It perhaps has too much in common with poker for comfort! 
     

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