Curve AdvisorKeymasterFebruary 11, 2016 at 7:40 pmPost count: 612
I always found it amusing that traders are thought of as one of the elite professionals in the world, but professional gamblers are thought of as degenerates. Because when you think about it, there really isn’t much of a difference in terms of what they do. It’s all about assessing risk and reward, and making the proper wagers.
The top traders can consistently make tens or hundreds of millions a year. But the top professional gamblers can consistently make millions a year. That’s not too shabby. And if you look at it from a ROI perspective, most top gamblers crush their trading counterparts. I’ve met a lot of traders whose trading style is what I would consider “reckless gambling”, and I’ve also met gamblers who I would consider “astute businessmen.” The line is blurrier than most people think. A former big hitter on the desk used to say that he would hire a top poker player over an MBA any day. This didn’t make me feel great at the time (since I have an MBA), but I probably agree.
The point of this thread is… many times, you can learn things from one disciple and apply it to another. And when I think about it, there are some really important skills you can learn from gambling that can be applied in trading. One of the things that led me to trading was my love of games and my discovery that things are more interesting when there are a few dollars riding on the side. I have a lot of experience in both trading and gambling (poker, blackjack, mah jong, bridge, etc), so I have a lot of nuggets to share.
Curve AdvisorKeymasterFebruary 15, 2016 at 11:41 amPost count: 612
KNOW WHEN YOU ARE GAMBLING AND WHEN YOU ARE TRADING.
This may seem obvious, but I am constantly shocked at how many people do not seem to know. Here is the simplest criteria… what is your expected value? If it is negative or zero, you are definitely gambling. If it is positive, you may still be gambling.
In case you need some examples, we all have that loser friend who think they are lucky at the slot machines. I don’t even know where to begin whenever I hear that. I’m married to one, and sadly, I think she is serious. I’ll agree it’s not gambling if they are like Billy Ocean (from Ocean’s Eleven), and they have some way of cheating the slot machine. But that would be gambling in another way – whether or not they go to prison. But this is not them.
You can still be gambling even if it is positive EV. Would you wager $1 million dollars on a 50.0001% chance in on a double-or-nothing bet? That’s +ev. But it’s still gambling.
When you are trading, there are many times when you are gambling but you may realize it. “Silver feels like it wants to go lower” (or higher). Based on what? Sounds a lot like my wife saying “I feel like I’m going to hit the jackpot today.” “But I feel it in my bones.” Yep – in both cases. And just like the casino, keep in mind that trading futures is a negative sum game… in the long run, there will be a net loss to the trader/gambler, unless you have an edge…
Curve AdvisorKeymasterFebruary 16, 2016 at 7:46 pmPost count: 612
One of my former managers had a great “feel” for the markets. He started a hedge fund, and went through a horrible stretch of timing (for example, he was long the Chinese equity market and was stopped out by his partner before it took off), and the hedge fund eventually closed. However, I do think his “feel” views overall are positive expected value, and much better than most. But my point is that if someone with great skills can go through a horrible enough stretch to shut down, that should give you some pause as to whether to base your career (or your life savings) just on “feel.”
The reason I bring up my former manager is because he is a good trader and I do not think he is “gambling.” “Feel” is quite hard to analyze. When you look at the markets, there may be things you are absorbing subconsciously that you may not be aware of. HOWEVER, for most beginners, this is NOT the foundation upon which to base your trading career. As per my Trading Philosophies thread, develop multiple lines of positive EV trading. You can always incorporate some “feel” trades over time, as the quality of feel is probably correlated to experience.
And I’m not trying to put down instinctual trading. It’s just that on average, most people won’t be good enough at it to build a steady career on. One of my other managers used to say that most good traders probably can only guess direction correctly about 55% of the time. This can be a good part of a diversified portfolio. But you’re going to need more than just “feel” if you want a steady career in trading. The line between “feel” trading and “gambling is very thin – even if you are good at the former.
Curve AdvisorKeymasterFebruary 22, 2016 at 3:04 pmPost count: 612
A LESSON FROM BLACKJACK – The size of your trade should be a function of your EV
There is a formula called the Kelly Criterion that indicates the optimal bet sizing. When you have a big advantage, you bet more. When you have a small advantage, you bet less. When you are at a disadvantage, you find ways to avoid playing (sit out, take a bathroom break, etc).
The premise of card counting or shuffle tracking is you identify the times when the deck is favorable for you, and the times when the deck is unfavorable. A majority of the time, the deck will be unfavorable (that is how the casino makes money). It is impossible to win at blackjack in the long run if you play every hand and have a uniform bet size. However, if you bet small when the deck is unfavorable and bet noticeably more when the deck is favorable, you can turn this negative EV (expected value) game into a positive EV game.
It’s a little obvious for an individual to vary his bet sizing from $10 to $100 whenever the deck becomes good, or for someone to sit out when the deck is bad. The casinos also keep track of the deck, so you will probably get flagged for being a counter. However, if you can signal to someone when the deck is good and they start wagering $1,000, that is one way you can increase your EV. This is the premise of the MIT blackjack teams.
Size matters. If sizing can turn a negative EV casino game like blackjack into a positive one, think about what it can do for your portfolio. It’s possible to have more losers than winners and STILL make good money, if most of your winners were sized larger. Think more about how to optimally size your trades relative to your advantage.
Curve AdvisorKeymasterFebruary 23, 2016 at 12:46 pmPost count: 612
A LESSON FROM POKER – Keep reassessing
You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
-Kenny Rogers, “The Gambler”
There is something that I like to call “hand fixation”. This occurs when you have a strong hand on one street, the next card(s) gets turned over, and you still think you have the same strong hand even though the environment may have completely changed.
For example, you are dealt AA in no limit holdem – the best hand possible pre-flop. You raise and get two callers. Your equity in the hand (odds of winning) preflop is around 73%. The flop comes down JT9 with two hearts. Your lock on the hand just went bye-bye. I’m not saying you couldn’t still win the hand, but your equity in the hand is now 31%, and you have the LEAST amount of equity among the three players in the pot. It doesn’t matter that you had the best hand pre-flop. What matters is what your hand is NOW.
You need to constantly reassess your sizing and levels based on the current environment. Is this the sizing you want, given the new information? Are your exit and stop levels what you want, given the new information? Another way to think about this… If you had NO position in this trade, is this the sizing and levels you would have selected? The markets can change in an instant. Don’t live in the past.
Curve AdvisorKeymasterFebruary 29, 2016 at 2:05 pmPost count: 612
A LESSON FROM MAH JONG – Know how everyone else is positioned
For people not familiar with this game, it’s similar to rummy, except with tiles instead of cards. Beginners are typically focused on their own hand. But experienced players also watch the opponents’ discards. Because knowing what your opponents are trying to do is at least as important as what you are trying to do. Why “at least”? It’s because the player to your right can select any of your discards, and you get to choose from the discards from the player to your left. You need to think about your optimal moves with respect to the entire table (knowing what everyone is trying to do).
This lesson also applies to many markets. Trading futures is a negative sum game – for you to make money, someone else has to lose it to you (and everyone pays brokerage). So you need to be aware of what others in the markets are doing and how they are positioning themselves. One example is getting into a crowded trade. It’s great when you get in early and people keep piling in and it works, but you don’t want to be the last one holding it when everyone wants to get out. Another example is knowing how people are positioned going into data releases or central bank meetings. Whenever you see the markets react in a way differently than expected, part of the reason was probably positioning.
You can analyze price action leading up to certain events to gauge price action, or look at positioning surveys, or look at open interest reports. But have an idea what people have done and are looking to do.
Curve AdvisorKeymasterMarch 8, 2016 at 12:44 pmPost count: 612
A LESSON FROM EVERY GAME – Bankroll management
Most people have no idea that bankroll management is a key part of playing blackjack and poker seriously. I suppose the “fish” (terrible players interested in poker to gamble), just take whatever money they have in their pocket and just plop it down on the table. However, for the serious players, there are some general rules about bankroll management.
For professional blackjack, you should have about 1000+x your minimum bet. So if you want to play at the $25 table, you need to have a $25K bankroll. This is different from the amount of money you bring to the table (which may only be a few thousand dollars). As you win, you can add to your bankroll (and possibly move up in stakes), and as you lose you may need to move down in stakes. This assumes you do something like counting cards or shuffle tracking, which makes the game +EV. Otherwise you are lighting your money on fire by playing a -EV game.
Most professional poker players have 40 to 100 buy-ins for the stakes they play. If you play with a $10 big blind (“BB”), then your standard buy-in would probably be $1,000. This means to play those stakes, you need to have about a $40K to $100K bankroll, depending on your relative skill advantage. Once you lose a certain amount (typically 25 to 50%), you are supposed to move down in stakes. So instead of playing at a $10 (BB) table, you may move to a $5 BB table. This way, you will always have at least the minimum bankroll (40 to 100 buy-ins). This is all in an effort to reduce what is known in gambling as “risk of ruin.” If you are a positive expected value player, such a system would ensure that you are never crippled and always in the game. Poker is all about long run expected value.
Now if a bunch of “gambling degenerates” can utilize this type of risk management, you should have at least as much disciple. Don’t be the fish. Don’t ever bet the farm on anything or put yourself in a position where one bad trade/run can ruin you. You never know what bizarre set of events could happen. If you develop multiple lines of positive EV (expected value) trades, you never need to. All those little bets will add up over time. And you will sleep better and make better decisions when you are not wholly invested in one trade.
Curve AdvisorKeymasterMarch 15, 2016 at 10:15 pmPost count: 612
A LESSON FROM POKER – Freerolls
Say you are dealt A9 of hearts and the board comes down KQJT, with two hearts. It seems highly likely from the betting on previous streets that your opponent has an Ace. You both have the highest hand possible at that point, so most of the time, you will just split the pot. But your goal should be to try and get as much money in on the turn as soon as possible. If you think your opponent will call an all-in bet, just go all-in (or bet as much as you think he will call). You and the opponent are probably tied for the hand. However you have a draw to the nuts (the best hand possible – a flush). So there is a small chance (~18%) you will get a heart on the river, to complete your flush. But once that heart hits, you will have a hard time getting your opponent to put in a lot more money into the pot. So you need to get your money in before that last card. You most likely would have just split the pot, but you have an outside chance at having the winning hand. This is what is known in poker as a “freeroll.”
There are freerolls in trading as well – bets that cost next to nothing, but could pay off huge if the scenario plays out. Earlier this year, you could have paid nothing to play for an ease (sell EDH 95 calls vs buy EDK 95 calls for 0). We rallied 100bps, and sure enough, an ease was priced in. It always astounds me when people don’t do a trade because a scenario is not “likely.” I suppose if you have severe capital constraints, this could be an issue. But my experience is that most people have a ton of underused capital. Always think about the “unexpected” event. One of the common trading errors is that people underestimate the tail probabilities. So if you can find a “zero cost” trade that does well in a “reasonable” tail probability, put some on. It’s literally a freeroll.
Curve AdvisorKeymasterApril 7, 2016 at 1:13 pmPost count: 612
A LESSON FROM POKER – Don’t be results-oriented
You’re always looking to make a “+EV” (positive expected value) play. But just because it’s +EV does not mean you will make money all the time. Sometimes you’ll win and sometimes you’ll lose. For example, if you are dealt AA, the +EV play is to raise. Just because you lost the pot does not mean it was wrong to raise (and make the pot bigger). In the long run, you will make more money with “AA” by raising preflop.
Whenever you get a bad result, you should always revisit your thought process in the trade to make sure that it was indeed +EV. It’s always possible you overlooked something, and what you thought was +EV was actually -EV. But don’t pitch what could be a profitable line of trading, just because your initial results were not great. Conversely, just because something works out really well doesn’t mean that is a great +EV trade either. Sometimes, you could have made a poor decision, but you made money anyway. So just try to keep making good decisions all the time, and don’t get overly preoccupied with your results. In the long long run, the money will follow your EV.
Curve AdvisorKeymasterApril 20, 2016 at 4:32 pmPost count: 612
A LESSON FROM EVERY GAME – Don’t be results-oriented
In every gambling game you play, you are going to make a good decision, and sometimes, it’s going to end up poorly. Just because it ended poorly doesn’t mean it was a bad decision. Think of it this way… if every “correct” decision was rewarded, then Las Vegas, Macao and Monaco wouldn’t exist. Why? Because for a majority of the games, the house would win EVERY SINGLE TIME, since they have the edge on every single wager (for most casino games).
There is also an element of this in trading. Many markets aren’t referred to as a “random walk” for nothing. Good luck trying to predict where the markets are going to be on a day-to-day basis. Even the best are only going to be right a little over half the time. All you can hope to do is to make the best decision possible at every moment. You are rarely going to get into a long trade at the absolute bottom, and you are rarely going to get out of your long at the absolute top. So if you are going to kick yourself, there is plenty of ammunition. This is a terrible mindset to have.
What you should be doing instead is, at every moment, think about making the most +EV decision. When something goes wrong, consider if you should have done something differently in the past, independent of the result. AND when something goes RIGHT, you should also consider if you should have done something differently. Because just as you may have made a good decision and fared poorly, you could also have made a very poor decision but made money anyway. The goal is to improve on your decision-making. The money will follow in the long run.
Curve AdvisorKeymasterMay 16, 2016 at 2:23 pmPost count: 612
A LESSON FROM POKER – Long term winning is all about the small to medium sized pots
Whenever you see poker on TV, they are always showing some absurd cooler (where both people have some monster hand and where most of the money was going into the pot anyway). I suppose there’s some skill in having an image to get paid off on your big hands. But if you ask anyone who is good at poker, the true skill is in picking up all the small to medium sized pots that happen with much higher frequency.
In trading, the “big” trade always gets the headlines. I’m not going to say finding a few big trades a year isn’t important to getting that massive payday. But there are some years where it’s just slim pickings, and other years where you may get something wrong. What’s going to help keep you going in between the big trades are all the small to medium trades that you need with higher frequency to make sure you have consistently profitable months and quarters. It’s not like you have to choose between being the tortoise and the hare. In trading, you can be both! While you are looking for the Big One, just pick up all the little ones too. Never say “nah, not big enough – I can’t be bothered.” All the little bits of positive EV add up over time.
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