In an article in the Los Angeles Times, author Nathaniel Popper singles out the experiences of Chris Fargis, who was offered a prestigious job trading stock options with Wall Street firm Toro Trading.
30 year old Fargis had no background in finance, but his six years spent as an online poker professional had swung the odds in his favour. It certainly marks a change from the yuppie culture synonymous with 1980s Wall Street – where only supremely educated, financial thoroughbreads would cut the mustard.
Now you had a multi-tabling, archetypal ‘poker geek’ at the epicentre of Wall Street recruitment. It may also seem quite ironic that an industry scorned for its casino capitalism in wake of the 2008 Financial Crisis would call on the services of a poker professional, all whilst the US government was doing its best to purge online poker.
But is the hiring of Fargis such a surprise given the discernible similarities between poker and trading? The answer is a resounding no.
Bridging the Gap
In terms of the psychological components, the two enjoy a symbiotic relationship. In his book The Poker Face of Wall Street, hedge fund manager executive Aaron Brown asserts, “There’s a certain maturity and ability to deal with risk that is hard to get any other way — unless you put the money on the table at some point in your life.” A successful poker player clearly boasts many of the faculties present in a successful trader. Even if you don’t know your Bloomberg from your bluff, it’s the ability to ‘pull the trigger’ that stands you in good stead to conquer the world of trading.
Fargis isn’t the only person to flit between industries. Brandon Adams and Bill Chen –now both successful poker players – swapped the hustle and bustle of New York trading floors for the glitz and glamour of Vegas casinos. Bond-trading guru Cantor Fitzgerald, founder of the eponymous Wall Street company, formed subsidiary group Cantor Gaming which supplies technology for poker, casino and sports-book operators.
Zero Sum Games
The similarities between poker and trading stretch far. Ignoring rake and spread or commission, both are zero sum games. In poker, the profits of winning players are balanced by the losses of losing players, and in trading, the profits of winning traders are balanced by the ‘losses’ of politically or economically driven trades. These ‘losses’ are incurred by big banks or financial institutions trading out of necessity, and thus inefficiently. It is the job of the retail trader to ride on the wave of this bank activity.
The consonances between trading and poker are further echoed by trading psychology author Brett Steenberger. He identifies both as “high-frequency performance activities,” and explains how poker and trading “combine elements of statistical edge with discretionary judgement.”
The former assertion means that more dedicated students accelerate the learning curve, and reap the rewards more quickly. A player who immerses himself in poker on a daily basis, whether through hand analysis or actual playing, will develop in a similar fashion to a trader who immerses himself in the markets, whether he is a fundamental trader who keeps on top of economic developments, or an expert technical analyst who always looks towards refining a market entry. The more you embrace self-development, the more prosperous your journey.
Steenberger’s second observation is equally compelling. He likens the markets leading up to an individual’s trading session as the cards a poker player is dealt. Sometimes the cards will provide a player with a strong edge. Steenberger continues, “When the market recently sold off on record put/call volume, for example, there was a strong edge to the upside. Similarly, drawing two aces offers far better odds than drawing a 2 and a 9 unsuited.” However, neither the trader nor the poker player will follow these odds religiously. It is important to assess the current conditions, and this is where discretionary judgement and cerebral poise come in to play.
Steenberger concludes; “A steep selloff on unexpected economic news will alter a trader’s willingness to bet on a bullish market pattern. Subtle tells around the table will tell the poker player it’s OK to bluff with a relatively weak hand. Poker players and short-term traders need to have an edge and know what it is, but they also have to be able to use real-time judgment as to when to proceed with so-so odds.”
Of course, in both poker and trading, individuals have different approaches and ways of realising their ‘edge.’ Some poker players may be more numerically inclined, and look to advanced mathematical concepts such as G-bucks and Nash Equilibrium to gain an edge, whereas others rely more on ‘feel’ and the ability to read opponents. Similarly, some traders may focus on technical analysis and utilise tools such as pivot points and moving averages, whereas others opt for a more fundamental study of economic reports and macro-economics. Meanwhile investors interested in company valuation with a view to purchasing stock will observe details such as balance sheets, the current board of directors or future product releases.
Psychology and Money Management
A sound understanding of risk to reward and money management is paramount in both trading and poker. A poker player well-schooled in pot odds, probabilities and variance knows that downswings are part and parcel of the game, and will switch limits accordingly. Equally, a seasoned trader will know that losing streaks and draw down periods are inevitable. The key to success and long-term profitability is bankroll management (in trading called money management). Just as a poker player may reserve 30-buyins for a designated limit, a trader will never risk more than 2% of his account on a single trade.
Discipline and a broad understanding of dynamics also play a role – just as a poker player maintains a rigid focus on +EV choices, a successful trader never deviates from his trading strategy, and will always test a new strategy meticulously using a demo-account and a trading journal.
From a psychological perspective, both poker and trading are inextricably linked. Deviating from your optimum game and line of decision making – called ‘tilt’ in poker – is equally damaging in trading. Essentially, both successful trading and poker require a catharsis – a complete suppression of emotions.
Esteemed trading author Dr Van K. Tharp claims that 60% of trading revolves around psychology and the controlling of emotions. Acting on feelings of greed or the desire to recoup losses can have catastrophic consequences. Both activities combine a willingness not to play – just as poker players adhere to the old adage of “know when to hold’em, know when to fold’em” by mucking losing hands, a trader will refrain from placing an order if the market environment does not conform to the ideal conditions outlined in a strategy.
Differences and Scaleability of Trading
At this point, it would seem that trading and poker are joined at the hip. There are, of course, noteworthy differences.
Poker is a game with rules and parameters – there are always six seats in a 6-max game, three options (bet, check or fold) and 1326 hand combinations in No Limit Hold’em. Action always goes clockwise, and there must be a small blind and big blind posted. The winner of a hand can only claim the money in the pot. A 6-max cash game cannot exist if such rules and fundamental structures are not in place. In trading, rules cease at the point of execution. Once a trader places an order, there is no limit to what he can win or lose – a trader must use his own discretion to place a profit target or stop loss. The markets are unrestricted, never ending entities, with the supply and demand being the only overarching premise.
This brings us to the next point. In trading, there is more scope to identify your niche. An aspiring poker player can effectively specialise in only three areas– cash (heads-up, 6-max or full ring), tournaments and sit n’ goes, across game types such as No Limit Hold’em and Pot Limit Omaha. A trader is faced with a plethora of options – he can trade currencies, stocks or commodities over several different time frames and each of these asset classes can be traded as different financial instruments such as spot, futures or options. Trading the markets enables more freedom, but also requires the development of discipline and self-management in order to counter-act the lack of given operating parameters.
Finally, trading offers genuine scaleability. An NL1000 player requires a different, more advanced skill set than an NL50 player to be successful. Poker is a multi-tiered learning experience. In trading, a trader who can increase his account by 5% with $500 on a monthly basis can do exactly the same with $50,000.
Of course, there are limits as to how much capital a trader or fund manager can inject into the market before the very act of opening a position begins to affect the price of the financial asset he is trading. The amount of money involved at this level however is incommensurable compared to the typical retail trader’s account– the capital needed to move the currency markets ranges in the billions. This leaves a retail trader able to consistently increase his account from hundreds to hundreds of thousands, or even millions, without having to develop strategies for higher levels of capital increase, since the problems associated with trading currencies in the billions are confined to elite financial institutions.
It would be outlandish to suggest that every single poker player can follow in the footsteps of Chris Fargis. But then again, it would be naïve to ignore the similarities between poker and trading. It’s now up to you to bridge the gap between felt and finance.