Poker Versus Futures Trading

  • October 5, 2014
  • Blog

I think it is very interesting to draw the comparisons between playing poker and Futures trading because they have a lot in common.

Poker is a game of skill (despite what uninitiated people may think). Yes we have no control over the cards that we are dealt, as we have no control over where the price of a futures contract will move.  However there are absolute mathematical principles we can implement that ensure over the long run we give ourselves the best chance of success. We gain “edge”. Edge is our positive expectancy over the long run.

In poker our edge can come from a variety of places. Using the idea of pot odds we can work out the probabilities of us hitting the hand we are hoping to get. This allows us to factor that into a risk versus reward proposition. For example if we work out that the odds of us getting a Royal Flush are 5% but we would have to risk half of our capital to stay in the game this wouldn't be a good proposition. However, if we have a 20% chance of getting a Royal Flush and we only have to risk 10% of our pot to stay in the game this opens up a very interesting proposition. If we ONLY play when we see opportunities like that you can imagine the amount of money that could be made. Top poker players will actually fold 70% of their starting hands. There is a huge edge to be gained from knowing the exact times you should play.

Poker players also need very strict bankroll management. They have to control how much they bet each time that will allow them to stay in the game long enough for their skill and “edge” to play out and finish positive.

This all sounds quite clinical and mathematical, however there is a glue that binds these concepts together and that is psychology. Being able to follow your plan, only betting when the odds are in your favour, knowing when to be aggressive, knowing that no matter how hard things get you have to stick to the plan, that is the only way to survive in a speculative industry. Anyone can learn the basic techniques and mathematics, but only the mentally strong can survive.

Futures Trading is exactly the same. The mathematical edges are not as easy to find, because the only way to know them is to learn from somebody that has traded futures professionally and supported themselves full time from it either trading in a hedge for or at a proprietary trading group such as I have. The techniques you read about on the internet involving technical analysis and Forex and other marketing friendly terms do not work. You have to learn how to really read the order flow of the market using the Depth of Market. This allows you to spot opportunities, such as in poker, that have a statistical edge over all other market participants. But there are actual techniques anyone can learn.

Once you have the techniques you will be able to understand the times when they can and cannot be used. Just as a poker player will know when to fold, or raise his bets. A Futures trader has to know they cannot vary their trading size as and when they feel like it but following an exact plan.

The biggest thing both poker players and traders have in common is they try to make the entire process as organised and process driven as possible. Once you can do this all the people that are just in it for a “bit of fun” or uneducated in the proper techniques just end up giving you their money. You just have to be strict in sticking to your plan, only playing with the correct techniques and the money comes as a by product for your patience.