Both ‘ Poker’ and ‘Trading’ may sound completely different, though, they have many things in common. This is why some renowned stock traders ask their employees to play poker. They suggest it not because that playing poker is fun. Rather, they recommend poker for it may help to hone trading skills. Some stock market managers even go on to say that good investors are good poker players and vice versa. To prove this, they often give an example of well-known hedge fund manager David Einhorn, who finished 18th position in the 2006 World Series of Poker. Let us find out what exactly are the parallels between the two:
Like a poker game, trading is also based on probability. Your research about a firm thoroughly, make the right decisions, but still, unforeseen events may happen and spoil the whole game. No matter how smart investor you are, you cannot be 100% sure of picking up the right stock. As an investor, you are just as a poker player, who has the best hand, but he is still not 100% sure of winning the hand. It is because a better hand is likely to lose if some unfavourable cards drop down on the table later on.
2.Money Management & Bankroll Management
Money management (trading) and bankroll management (poker), both require money management skills. A smart investor always diversifies his or her portfolio, instead of investing all the money in just one stock. Even if a stock has a high probability of generating revenue, they don’t put all their money into it. The same principle applies in poker. Even if you have a hand with a 75 % chance of winning, you don’t commit all your money by going all-in, because you still have a 25% chance of losing everything.
3.Similar Psychological Pattern
Both trading and poker follow a similar psychological pattern. Sometimes, both investors, as well as poker players, make emotional decisions rather than rational ones, which puts them into higher risk. As poker players, some investors are vulnerable to their own emotions. When they make the right decisions and their investments go up, they become so bold and sometimes so overconfident that they start risking huge money. The same thing happens to card players. When they start winning, they become bold and begin to play too aggressively or start betting heavily even with average hold cards.
One major similarity between poker and trading is that they both involve incomplete information. A poker player may have a strong hand, but he or she is still not 100% sure of what cards other opponents hold. The same thing applies to an investor who may predict a good return but may not be 100% of it. So, decisions in poker and stock trading are often based on incomplete information.
5.Risk Management Skills
Both poker and stock trading require risk management skills. Be it a game of cards or stock trading, your goal should be based on EV+ ( Positive Expected Value) while betting or trading. You must understand how much to bet or how much to invest, or how much you can afford to play or trade in a week or month. Decisions-making based on incomplete information of ( Positive Expected Value) is what works, in the long run, to win or lose your money via playing poker or investing in the stock market.
Remember, the best poker players or traders are those who can handle each situation and may play the same hand or trade the same amount of the money in different ways to win higher returns. These are often skilled individuals who are making a good living from what they are doing. While it may not be easy for you, there are again tricks and techniques, which you can learn and get started. Finally, it is up to your own analysis that may or may not pay off. If you have good analytical skills, things are going to be in your favour.