I've heard many people say that if you are good at poker, you will be a good trader. I never quite related to that fact well enough in my college days. Not any more!
Let me first make it clear that I am talking about trading being similar to poker, and not investing. Investing, obviously based on fundamentals, is very similar to bridge. But that's a topic for some other day, which will come very soon.
So yeah, back to poker. The analogies I am making is for the secondary market trader functioning in fairly liquid markets. Let me begin with the similarities which exist in the setup of poker and trading.
Poker is a zero sum game, and trading is nearly zero sum, with its trade execution costs (transaction costs, bid-ask spreads, etc)
The cards held by the player represent the fundamentals of the company's stock. Hardly useful for trading, especially during a constrained time horizon. Your trading strategy will win depending on a lot of factors, and fundamentals play a very small role. Rockets are busted as frequently as they end up winning.
Each step while opening the community cards represent the unveiling of key macroeconomic market parameters, e.g. change in interest rates. They are macroeconomic because the affect everyone's holding. They will favour some companies/positions and work against some other. The trader exits the position if the data unveiled hampers the position. The trader might also have to exit the position if the cost of continuing the position (e.g. margin calls) is out of his budget, even though the odds are in favour.
The bets by a player represent the information the company is trying to communicate to market players, in the form of press releases and Financial Statements publications. Frequently enough, they hide/misrepresent information, or they hold up their biggest piece of information till the fourth quarter (which represents the biggest bets being made on the river).
Reading people's faces represents the Behavioral Finance element. The trader will win the pot if he reads the mind of the junta correctly. Understanding the sentiments of the junta is the (I can't stress this enough!) most important art to be a good player/trader.
Apart from these, various participation strategies exist which are similar in trading and poker
There's also the reputation factor. Consider a trader who is widely perceived as a god by the market. If he decides to take a certain non-anonymous position in the market, that position will be regarded a sure shot success strategy. Therefore, it will be hard for him to find a dealer who takes the counter-position of this trade.Similarly, a player with a reputation of being tight, will always find a lot of folds when he decides to participate in the pot.
There's a poker strategy which many people use, I call it a test bet. Its similar to a c-bet, but the motivation is different. Immediately after the flop (and sometimes the turn), I'll put in a small bet to judge what others are upto. If this bet results in some action, I am in a much better position to judge whether to raise/fold/call. This is similar to the trading strategy where traders place small limit orders above and below the current market price, to gauge what the market is upto. In case these small lots get executed, they might pull in (similar to a raise) or pull out (similar to a fold) the big lots.
I am sure there are many more strategies which are similar in poker and trading. But I haven't played poker in a while, and I haven't done trading at all. Any more analogies are welcome!
Let me first make it clear that I am talking about trading being similar to poker, and not investing. Investing, obviously based on fundamentals, is very similar to bridge. But that's a topic for some other day, which will come very soon.
So yeah, back to poker. The analogies I am making is for the secondary market trader functioning in fairly liquid markets. Let me begin with the similarities which exist in the setup of poker and trading.
Poker is a zero sum game, and trading is nearly zero sum, with its trade execution costs (transaction costs, bid-ask spreads, etc)
The cards held by the player represent the fundamentals of the company's stock. Hardly useful for trading, especially during a constrained time horizon. Your trading strategy will win depending on a lot of factors, and fundamentals play a very small role. Rockets are busted as frequently as they end up winning.
Each step while opening the community cards represent the unveiling of key macroeconomic market parameters, e.g. change in interest rates. They are macroeconomic because the affect everyone's holding. They will favour some companies/positions and work against some other. The trader exits the position if the data unveiled hampers the position. The trader might also have to exit the position if the cost of continuing the position (e.g. margin calls) is out of his budget, even though the odds are in favour.
The bets by a player represent the information the company is trying to communicate to market players, in the form of press releases and Financial Statements publications. Frequently enough, they hide/misrepresent information, or they hold up their biggest piece of information till the fourth quarter (which represents the biggest bets being made on the river).
Reading people's faces represents the Behavioral Finance element. The trader will win the pot if he reads the mind of the junta correctly. Understanding the sentiments of the junta is the (I can't stress this enough!) most important art to be a good player/trader.
Apart from these, various participation strategies exist which are similar in trading and poker
There's also the reputation factor. Consider a trader who is widely perceived as a god by the market. If he decides to take a certain non-anonymous position in the market, that position will be regarded a sure shot success strategy. Therefore, it will be hard for him to find a dealer who takes the counter-position of this trade.Similarly, a player with a reputation of being tight, will always find a lot of folds when he decides to participate in the pot.
There's a poker strategy which many people use, I call it a test bet. Its similar to a c-bet, but the motivation is different. Immediately after the flop (and sometimes the turn), I'll put in a small bet to judge what others are upto. If this bet results in some action, I am in a much better position to judge whether to raise/fold/call. This is similar to the trading strategy where traders place small limit orders above and below the current market price, to gauge what the market is upto. In case these small lots get executed, they might pull in (similar to a raise) or pull out (similar to a fold) the big lots.
I am sure there are many more strategies which are similar in poker and trading. But I haven't played poker in a while, and I haven't done trading at all. Any more analogies are welcome!
