5 Lessons Poker Can Teach Traders

We’ve mentioned how trading is very similar to poker before on New Trader U. Today, let’s delve into these similarities and the key takeaways that traders can apply to their everyday profession.

From the get-go, you can already notice that it’s all about mindset. Here’s what traders can learn from this popular card game:

1. Stick to the plan

Steve Pomeranz states that good poker players already have a solid strategy even before the game starts. He’s an esteemed Certified Financial Planner who’s been in the investment business since 1981, so his advice is worth taking note of. For both poker and trading, you shouldn’t be impulsive, especially because the stakes can involve large sums of money. So long as you have a step-by-step plan to achieving your objective, you can maintain your composure.

2. Know the math

Both poker and stock market trading have a lot to do with numbers. In poker, your mind must run through the possibilities quickly as each card gets dealt.

In trading, you need to assess the probabilities of the stocks that are trending upwards. How long will the bullish movement last and when is the right time to buy shares? You have to do your research to make more informed decisions when it comes to your trades.

3. Always go for the long game

Emotions can be the downfall of traders and poker players. Impatience, frustration, and ambition are the root of impulsiveness, and those who take high risks may actually end up with low returns or huge losses. This is true whether it’s going all in during a poker game or buying rising stocks too soon.

Take the glamor of trading and poker away, and think of them more like a job where you’re trying to achieve a goal. This requires a procedure as well as time. The pros play it smart by always knowing when to fold, even if there’s only a small percentage that they could lose or just break even.

For trading, it means putting money in companies that have realistic goals. It’s not always advisable to invest in exciting startups because many of them burn out early.

5 Lessons Poker Can Teach Traders

4. Study the masters

Observe the pros and find out what they do to bring their A-game. In a previous post on New Trader U, we looked at some of the best poker quotes that can also be applied to trading including some classic lines from the legendary Amarillo Slim. He said that “Poker is a game of people – it’s not the hand I hold; it’s the people I play with.” Like Steve Pomeranz, this man was a master of his craft. He had an excellent understanding of probability as well as players’ emotions. Amarillo Slim won 4 WSOP bracelets during his career so he really knew what he was talking about.

We’ve discussed about how to keep emotions in check, but in reality, they still slip sometimes. These emotions manifest in players’ “tells” which are subtle physical reactions to the hands they are dealt. Play with the same competitors long enough, you may notice facial tics and hand gestures that can signal what kind of cards they have. The same goes with traders – buying even when stock prices of a certain company are going up is an indicator of investor confidence in said firm. You can use these signs to assess if a stock is undervalued or overvalued. In a more general sense, paying attention to the most actively traded stocks may allow you to predict market sentiment.

5. Your every move affects everything

The nice thing about both poker and trading is that if you play it smart, you can influence the outcome of the situation. Business Insider points out that the chips you throw in during a poker hand is an indication of your confidence. This is applicable to trading as well, because the stocks you buy or sell can cause ripples in the market, especially if done in large volumes. Hedge fund managers sometimes pull a “doing a reverse the desk” move where they unload a portion of stocks that can cause other brokers to follow suit. They’ll then use the freed up cash to buy the same stock at a greater quantity at a lower price.