Archive for May, 2011

The Best Trading Practice Simulator: Texas Hold’Em Poker

May 9, 2011

When learning to trade, there are many areas to work on. You have to find an edge. You have to have screen time to learn what different market moves look like as they unfold. You have to have a trading plan and back/forward test your ideas. You have to understand what your stocks / instruments behave like. You may paper trade in a stock market simulator. Like I describe in my WWJT post, many worry about minute details before they institute a foundation (if they ever do). Those details are important, but you need the foundation first. And one of the best ways to practice the foundational skills is through that old trader favorite: Texas Hold’Em Poker.

What are the foundational skills I’m talking about? Well, as the Phantom of the Pits says, Rule #1 is cut your losses. Lose quickly and lose small. Rule #2 is press your winners. You need to have an idea of what an edge looks like. You need to recognize when the markets are likely to be bluffing and when they are serious about a move. You have to accept getting bad beats. You can’t bet so big that you have to win any particular hand. If you play poker right, you are working like the house, not the gambler. Without practicing and implementing these skills, whether in trading or in poker, you are just blindly gambling–and you’re just the kind of sucker the casinos and the brokers love to see coming in the door. My biggest battle has always been psychological. And I’ve been learning a lot more by playing hands of poker than I ever did with a stock simulator!

To start with, let’s talk about bet size (or for trading, position sizing). While playing my Texas Hold’em games, the first big thing I noticed is that my bet size had A LOT to do with my psychology during the hand. I had a fake $10,000 to start, and I wanted to grow it. I started at the recommended table, where you buy in with $2000 and blinds were $5/10. Typical pots were going for around $500. If you lost four times you were blown out of the game, and took a 20% drawdown on your account.

As I started to play, I realized that I NEEDED TO WIN on hands where I had put a lot in to the pot. I pressed sub-par hands to “see if it would bail me out”. It was too painful to walk away from the money already “lost” on the table. Sound familiar for trading?

I realized this and decided to go down to a smaller table. I bought in with $200 and blinds were $1/2. Now, I had enough of a bankroll that it didn’t matter if I walked away from a pot. I was paying $20-40 to fold instead of 10 times that amount. I was suddenly free to be picky. I could fold without pain. I could wait for my hand, where I knew I had a huge edge, and then press. I ended up doubling my money. I found the hands in general started to get a bit boring, and that’s how I knew I was doing it right.

The lesson for trading? Bet small enough that you can walk away. Don’t bet so large that you CAN’T be stopped out. You have to be willing to walk from every trade you make with the loss without flinching. If not, you are sizing your positions too big. Any one trade can make you, with a huge runner. But you CANNOT allow any one trade to break you. Fold early and fold often. Make it boring. Bring enough of a bankroll to make a stop loss painless. Then you have a foundation where your psychology can work for you, not against you. Remember: you will win when the other guy makes the mistakes you used to make. He’ll press on a sub-par trade because he can’t afford to take the loss. But lose he shall.

More ideas to come.

When I can, I play as “pro” on the free VIP Poker app for iPhone:
Link to iTunes page