Position Sizing

One thing I find helpful about no limit poker in relation to trading is position sizing. Every hand you play requires you to decide how much you're willing to risk. Sure, you can bet the same amount each time, but, as many new players will soon find out, that does little to nothing to limit your losses, throw off opponents or maximize your gains. If you do not know how much to bet and when, you're going to be at a severe disadvantage.

The more thought and attention I give to trading, I'm finding the same to be true. If you are able to control the amount you put into play depending on the context and conditions surrounding a trade, you can minimize risk and maximize potential profit. Say you are uncertain about a specific trade. Why not cut down the amount you're willing to risk on it? There's no real need to risk the same amount on every trade. If you're confident about a trade, put on some more money. As your confidence increases, add to your position. As it decreases, subtract some off.

Being able to successfully manage risk in this manner increases your strengths and decreases your weaknesses. Put your money where it's going to win.

1/3

I read somewhere that true poker sharks play about 30% of their hands. Of course, such stats vary depending on a number of things. At first, I was skeptical. But, the more I play the more I realize the necessity of playing more than the prime hands. For one, people will begin to pick up on your hand range fairly soon if all you play are the top ~10% of hands. Because of this, they won't pay you off for those hands. They'll wait until they have the advantage with some underdog and try to get you to pay them off.

If you play a wider range of hands, however, your opponents will have a tougher time guessing your current hand among all your other hands. Such play not only allows you to benefit when the flop contains nothing for either player, but also allows you to reap the benefits of stronger hands that others may at times hesitate to play against.

Playing this way is much harder, which is probably why most will not play like this. It is hard to remain tight, as tightness requires a good ability to read hands. You need to know hold an edge over your opponent by being able to pick out what he is likely to have and how much you should risk against him or her this round. That's the only way you can remain tight while playing a wider range of hands. And to increase your effectiveness, you need to be aggressive more frequently. Say you think both you and your opponent missed the flop, but you at least have an ace high or find that your opponent folds more frequently than he should. Then bet. You have an edge; don't let it go to waste.

PS: Gotten back into poker over the last couple of days. I see so much improvement in my game, both intellectually and emotionally. I really hope to achieve this level on the trading field some day.

The Reason

I posted yesterday's post for a good reason: My main desire while trading or playing poker (or doing much else) has not been to win. I need to admit that. Perhaps it seems trivial; but, to me, it defines a major turning point in my thought.

PS: Lots going on. Moved. Hanging out with friends. School starting soon. More later.

Why do you do it?

I skimmed through several books this weekend. A part of one of those books stuck in my mind: "Why do you do it?" In the book, the author is referring to the reader's reasons for playing poker. He asks if you do it because you want to make friends. Or if you play to relax, or to get out of the house. Or, perhaps, because you want to win and make money. The author had a PhD in psychology and rightfully pointed out that many people will tell you they play poker to make money, but truly play for other reasons, likely subconscious reasons.

The reasons do not mesh well. Playing to relax and to make money will not allow you to maximize either relaxation or profit. Saying that you're playing to make money while actually thriving on the thrill of the "gamble" will hinder your growth. You have to be honest with yourself about your feelings in order to progress.

Same goes for trading. Are you really trading to "win" and make a profit? Or is that just what you say?

Interesting Fact

If since 50days after GOOG went public you traded it using a simple 50-day MA strategy you would be up 243%. All it requires is you to cover any open shorts and buy GOOG at the open, following a day when GOOG closes above its 50-day. When it closes below its 50-day, you do the opposite: sell any longs and then short. While to many traders who want to make returns like that every day (haha), it may not sound like much. But a decent gain considering the plan is simple and easy to execute. Also, that is with ~65 trades, so commission shouldn't take too big a chunk out of the person's account.

I've been using Excel (well, openoffice's version called calc) to back test various strategies. The one above was me trying to figure out how the hell to use the program. At first I had to enter all the data manually. Then I figured out you could import data from a website (such as finance.yahoo.com), which made things so much easier and more complete. The same thing happened with formulas. At the beginning I would enter formulas by hand, but then figured out you could merely drag the same formula over multiple rows and that it would incrementally change the values for you. Such is the beauty of technology.

Short Update

Haven't been doing any trading these last couple of days. I spent some time moving and some more time hanging out with friends. Any other free time I had available went into making stock/currency price spreadsheets. I'd love to get back into trading the S&P eminis, but would like to have a much, much better grasp of the overall market before I buy/sell a contract. I'm going to be back in school soon, so I'm not entirely sure when I will get to trade some ES; albeit, there will be a ton of prep work beforehand.

On a side note, I played some poker over the weekend with a couple of friends. $10 buyin and I ended up with $13.75. I had a slight advantage even though one guy plays poker at his office amongst various options traders. Fun stuff. Live games are so much more engaging than online poker games. You just can't beat it.

Carrying a Cat by the Tail

"Any plan you develop should emerge from experience—and the opportunities that you observe during that experience." - Enhancing Trader Performance by Brett Steenbarger

"A man who carries a cat by the tail learns something he can learn in no other way." - Mark Twain

"You can't step twice into the same river. " - Heraclitus

"One must learn by doing the thing, for though you think you know it, you have no certainty until you try." - Aristotle

For the beginning trader, or even those further along yet still stuck in various forms of trading dogma, developing a plan often involves something pernicious: using someone else's ideas without personal experience. Many of the methods described in books and online tutorials can work ^[1], however, need modification depending on the situation. This requires experience. How do you know if a market has gone from bearish to bullish or vice versa? Experience. There isn't a well-defined method for making that determination (at least not right off the bat). If there was, no one would tell you. Trust me, you don't have enough money.

How do you know what effect something like the FOMC could have on markets without actually experiencing it first hand? When I started trading I didn't know what could happen on FOMC Days. At first, I experience large windfalls. Lady luck chose my side. But, this did not allow me to experience the importance of such events. Later, when the events (which I hadn't investigated much) started producing different results, I lost lots of money. You need experience in order to understand such things and their evolution of meaning. Some books out there may go into such detail ^[2], but most will not. Most may mention news offhand but focus entirely on reading candlesticks without explaining context. Some may show you Fibonacci lines ^[3] but not explain why they place the beginnings or ends here or there. Many books may only show you successful implementation of such signals--failing to alert you to the instance where a doji may fail, or a gap does not act like resistance/support.

How do you know what your mind will do with $100 on the line? $1000? $5000? $20k? Your home? Without experience, you may assume that money's psychological effect will be minimal. Unlikely. Perhaps you think you will be disciplined. Really, you do not know what disciplined even means yet! How do you learn the perfect baseball pitch when you have never thrown a ball before? Or the perfect tennis swing without ever having played? YOU DON'T! You need to play first. Experience the weight of the objects in your hands. Begin developing a feel for the various nuances. Perfecting your skill comes later.


Basically, without experience you cannot create a good plan. Even if you do, you will have trouble executing it. Furthermore, and I think most importantly for beginning traders, without experience you cannot trade someone else's plan well! I don't have enough football ^[4] experience to play much less formulate a winning plan on Superbowl Sunday! I could take one of John Madden's plays step for step, but I doubt I could invigorate the team like he can; I don't have the skill. Why are you trying to do that with trading?

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Notes:

[1] This excludes most of the sites, endorsed by someone you have never heard of (and no one else has either), with stories of overnight success, rags to riches (in a week), and with a paypal link at the bottom. Also excluded are: numerology sites, astrology sites, or basically anything without some solid logical reason for working. They may work once or twice, but prepare for the illogical to eventually leave you homeless, and the guy selling you the package rich. Back.

[2] An interesting book that explains some of the Federal Reserve actions over the years (especially the Volker years) is Secrets of the Temple: How the Federal Reserve Runs the Country. It is rather thick and probably won't benefit your trading enough to warrant such an endeavor. But, it is information for the interested and/or hardcore. Back.

[3] I'm not a fan, do not use them. I would only (and hesitantly) suggest using them like others use pivot lines. Remember: there's nothing magical about them. Life isn't that beautiful/simple. If it were, we'd all be rich. Back.

[4] Not soccer for our international friends, although it would probably serve just as well :)Back.