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Poker is not a skill game in the same way that chess and bridge are. That's because there is much short-term luck in poker, whereas there is virtually no luck in chess and bridge. Still, we can't help but notice that it's the same people on TV winning tournament after tournament. Players like Phil Helmuth and Gus Hansen typically seem to do well. Chris "Jesus" Ferguson said that "you don't measure how well someone plays by his performance in one tournament, rather you judge him on how well he does over a year. Is he profitable?" Does that sound familiar? Sometimes, even investing geniuses like Warren Buffett buy stocks like BUD that tank in the short-term. But does it really matter? No, it's the long haul that matters. That is, long-term profitability. Today, we will discuss systematic trading and avoiding the phenomenon of "tilt".

Every Pro Has A System

Profitable poker players build a system and stick to it. So do profitable traders. There was once a TV reporter that asked a champion poker player what the secret is to winning so many hands. He answered that the object is not to win hands, but rather to make money. That being said, strong players play strong hands with few exceptions. They don't get involved in hands that have a low probability of winning. Instead, they invest in hands that have a high probability of winning. The point is that traders and players should stick to the situations that have a high probability of winning. They should also remember that the object is to make the maximum amount of money – not the maximum number of trades. It sounds simple enough, but it's not the whole picture – why would anyone change his system?

"Bob" is a very intelligent doctor who plays poker weekly at a local casino. He sticks to good strong hands and folds everything else. In fact, his system is very precise. He only plays 2 face cards, an Ace and a high card, or a pair. The system worked like a charm for 3 months. Then one night, Bob threw away a 7-2, a terrible hand in Texas Hold'em. (This hand is the worst and should rarely be played if ever.) Then, low and behold, the board came up 2-2-7, and the Bob missed out on a full house! He started to go crazy His head began to steam and his face grew hot! "Why did I throw that hand away?" he fumes. By the time the night was over, Bob abandoned his entire system that had made him thousands of dollars. He was convinced that his system was flawed and the game was all luck. The next 3 months were the worst of his poker career. He gave back the thousands he had earned and lost his mind as well.

This phenomenon also exists in trading. One thing that traders love to do is watch their trades after they exit. They want to be right so badly. They watch in horror as stocks skyrocket right after they sell, and begin to question the system that may have been working for them for years.

Lesson 1: Adhere to a precise winning system. Anything can happen in the short term. Stick with your system until long-term analysis determines a change is necessary.

Tilt

Have you ever shaken a pinball machine until it shut down? If not, you should know that if you pick up a pinball machine in the middle of play or if you kick it too hard with your knee, lights start flashing and the flippers stop working. The lights blink and you see the word "tilt" on the screen. That's where the word tilt comes from in poker. It's when a player loses control and shuts down like a pinball machine on tilt.
Getting angry at that moment is not what tilt is about though. It's about what happens AFTER a player goes on tilt. Often times, a player will get a good hand like a king-high flush only to have it beaten on the "river" (the last card) by an Ace-high flush. Many players describe that situation like this: "I feel my face getting hotter, and soon I feel numb". Or, "I get very angry and start swearing". Soon afterwards, the same players will be seen playing inferior hands that they would never play, or they might start bluffing too often. The bottom line is they can turn $10,000 worth of bad cards into a $100,000 loss. Is that possible? You'd better believe it is.

The amazing thing about tilt is this: it exists in EVERY competitive field. It happens to basketball teams when they are losing and even when they are WINNING big. Have you ever seen your favorite team up by 20 at the half only to go on "tilt", slack off, and lose the game? It happens all the time.

Have you had a huge trade that paid off big time and then soon after made you felt like Superman and you started trading like a reckless maniac? Many traders have! Have you lost huge on a trade and started a month-long or year-long slump? Most traders have at least once. It all comes down to emotions! Recognize that there are times when you lose control and examine ways to avoid it. Better yet, when you recognize that you are on tilt, stop trading for a specific amount of time. I recommend not trading for the rest of the day at least, or depending on severity, maybe even the rest of the week.

A strong poker player once advised, "Do not judge yourself on how the hand turns out. Instead judge your actions. You have no control over what comes next. You should criticize your play if you play badly and the hand turns out a winner. You should praise your play if you play well and the hand turns out bad. This keeps you in focus on your SYSTEM and helps you avoid "TILT." It sounds philosophical and psychological, doesn't it? It is! So, do the same when trading:

* If you trade well, and a terrorist act drops the value of your portfolio and the market big time, relax. You can only do your best and no better. This will save you from a lot of mental blow-ups.

* Also, don't congratulate yourself when you make a trade mistake and it turns out profitable. That's the worst thing you can do! This will cause you to question your system or revert to luck.

* Do not express emotions when trading. That means no jumping out of your seat when you have a winning trade. Okay, you are allowed to grin, but that's it! No cursing, crying, or hiding under your desk when you have a losing trade.

Can you believe poker teaches us about trading? It does, so don't forget these 2 lessons when trading:

1. Operate by a system. Take note of it when you deviate from your system. Review your system at least quarterly.

2. Avoid "tilt" by keeping your cool when you trade and treat trading like a business. Focus on your actions and not short-term fluctuations (until your quarterly review).

Be disciplined, and trade well!

Have a great week!

Price Headley, CFA, CMT – President & Chief Analyst
James Brumley – Research Analyst
Daily Trendwatch Archive
http://www.bigtrends.com/document.jsp?documentid=118

This was an excellent post. Although I haven't traded yet (too little money for a broke college kid!), I feel that this was a very insightful post. I'm not a good poker player either, though I'm not exactly sure how to start learning. My professor for simulation said "if you have to start on something big, there's only one place to start–somewhere"…I'm just not sure how to go about it yet.

Ilya, if you feel that you don't have sufficient funds to trade/ invest sucessfully, there are still plenty of ways to get started
1) – start with a simulation account, marketwatch.com, investopedia, whole host of websites give you practice accounts, these are always great places to begin, learn, and get confidence before getting to the part of losing money (and you will lose when you begin with real money, everyone does, there is hardly any exceptions in that regard). I personally paper traded for almost a year before convincing my parents/ grand parents to lend me $1000 bucks in high school.
paper trading isn't as glamorous or ego boosting as making some real dough, but it brings patience, as long as you always treat your trades as real, and trading is all about controlling your own psyche.
2) If you currently have a job, even if part time, deduct a certain portion of it,no matter how small, and add to your brokerage account, think of it like a tax only that its not, within a year you'll save quite decent amount to start trading/investing with
3) no matter how much money you begin with- never lose more than 5% of your total brokerage account, I used to try to keep my account at 930-950 at all times when I started with 1000. No matter how bad your early mistakes, if you preserve your money and cut losses off at 5% you'll have enough money to fight and make tons more one day.
4) try to open an account with trade king or other online brokerages which offer cheaper commission costs, with less money commissions are the real killer; while execution wont be flawless for a day trader. a fellow member of our group Marko says that trade king works just fine for him and he has no problem with it. in any case day trading is not a great way to start trading (imho)

Ahhh, thank you. I know of a CFA that advises my mother on her 401k planning that also suggests me hedge funds to look for to try and work for. But sadly, I lack the computer science capabilities to make it into places like Renaissance. So far, I'm actually planning on working with the CFA that I know to hopefully start up.

I'm not planning on blindly trading. My "system" so far works like this.

1) Watch Jim Cramer's Mad Money
2) Confirm Cramer's advice with the CFA I can personally keep in touch with.
3) Upon a double confirmation, invest in said firm.
4) Keep up with said firm by checking for any new articles on it every day.

And in the meantime, I'll try to either A) work towards a financial application of actuarial science, one of my favorite applied quantitative fields or B) try to directly get to Wall Street.

I know I'm terrible with hypothetical situations. I tend to play extremely silly since I know nothing is on the line, both in poker (something which I'm very new with) and trading, which I'm also new with, but have hopes on making my career in a related quantitative field (not sure whether trading or i-banking or whatnot)…as an information systems engineer I'm not quite sure what I like yet, as my experience with choosing stocks is limited to nonlinear programming code with hypothetical expected returns and hypothetical variances–and that's at the height of undergraduate level optimization courses.

I just feel that finance is something I want to do since it lends itself to quantitative analysis and there is such a huge demand for it, meaning excellent pay, the means to an end, which is to live life to its fullest.

And since I hit post too soon, a big thank you for your advice.

i cannot agree more on your post. my respect to you sir. adding one of my views to this great post is.. i believe everyone who trades must find his niche also. i.e. some are natural locals… good as a scraper in a pit but if you forced him to do position or swing trading, he might have done it badly… i feel that we cannot disregard this impt area as well.

Just my 5 cents worth:P

im just curious.

how does day trading play work with this? it seems like what we should do is develop a long term plan–and that is the only way to make money. yet, i see day traders getting super rich (but then again some lose everything).