On this holiday weekend I thought I would re-run one of the best columns from last year.
This week Business Insider had a great profile of a professional poker player called Andrew Seidman. He has been playing the game since 2006 and has had massive success as well as some setback since then -- but perhaps what makes his story so compelling is that he is basically a regular self-taught guy rather than some Mensa math genius. I am taking the liberty of snipping parts of the interview (.. so apologies if some of the quotes appear as though you've entered the room mid-sentence) and affixing my own comments to his observations.
On capital and law of large numbers
"However, it doesn't usually work that way. Usually people play with 20-40 times the buyin, well within a risk-of-ruin scenario in which a person could just get crushed by luck and bust out. Also, sample size matters. Can I go to Vegas and be assured of a winning weekend? No. Can I move to Vegas and be assured of a winning year? Probably."
Divide the "20-40 times buyin" line and you quickly come up with 5% of 2.5% bet size. This very close to what professional traders use to size their own trades. In fact I would argue that in FX you would want to be even more conservative and use 1%-2% risk limit per trade. Why? Well as Seideman explains by chopping up your bet size to small chunks you stand a better chance of avoiding risk of ruin -- a situation where the market, or the cards simply produce a very long string of negative outcomes.
Next. Size matters. In FX and in poker the more trades/bets you take the less likely you are to fall victim to a bad string of outcomes. Mind you if you strategy in trading or in poker is flawed from the outset, you will still lose. But if your probabilities are accurate the longer you trade/play the more likely the outcome will line up with expectation.
Good trading/playing means knowing the probabilities as well as the behavior patterns of your opponent.
"First, you have to psychologically profile your opponent (everyone fits into one of three general profiles); second, you have to understand basic probabilities (e.g. if I have two pair and my opponent has a flush draw, I win 65% vs his 35% and these are relatively easy to memorize); third, you have to predict your opponents likely holdings."
What's absolutely key about understanding this passage is that Seidman not only focuses on the basic probabilities, but on the likely reaction of the opponent. That's why just knowing the news in FX is never enough. You have to understand if the market is ready to accept the news ( its in a momentum mode ) or reject the news (it in a mean reversion mode). Profiling the state of the market is just as important as acting on the immediate newsflow.
Adjustment is key
"Good poker players go through all of that process and are really mentally engaged trying to determine those things. Weaker players really don't do any of that and make purely emotional decisions (conservative players never really bluff, crazy gamblers basically always bluff, etc.)".
This is SUCH an important point. Good traders/players always continue to learn and observe adjust their strategy within a properly designed framework. Bad traders simply repeat their emotional behavior over and over until they are bust.
Last but not least -- successful players compete with those who are weaker than them. This is a very common mistake that retail FX traders do all the time. By trying to trade right after the news retail traders are playing against much stronger opponents and institutional algorithms shred them to bits as a result.
Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.