Remember your first trip to a casino?
I do, and I remember my experience very well. It was in 2000, in a plush casino in Tunisia. The grandeur inside it would not go amiss amongst the palatial casinos of Las Vegas. The buzz being created from the different noises produced by the various tables and machines the casino had been kitted out with, plus the joyful screams of the revelers inside was simply electric. The moment I walked in, I was taken away by this human tsunami of gambling energy and excitement.
I was not much of a gambling man myself so I stuck to what I knew, which was blackjack. I won some hands and lost some hands and I walked away with pretty much the same amount of money in my pocket. However, what I remember most is walking around in awe of those at the poker tables especially those with the mountain-sized stack of chips next to them. It just seemed so cool and captivating. I did not have a clue about the rules of poker so the first thing I did when I got home was to read up about them.
Poker is an intriguing game where the psychology, strategy and risk management mirrors that of trading. Now let's be clear here: I am not talking about the amateur poker player who has the odd flutter now and then. I am talking about the professional poker player who has learned to make a living from it. One who has perfected his technique and is able to gain substantial and life-changing monetary gains from it. One who has turned it around from being a game of chance to being a game of odds and high probability setups.
So how does the strategy of a poker player mirror that of a trend trader?
In poker, a professional will only risk his chips when he feels that his set of cards plus those on the table have a higher probability, hence an edge, of taking the pot then his opponents do. An edge, in gambling, is defined as a systematic advantage a player has over his opponent.
A private trend trader only enters trades where price has a high probability of going on to reach a predetermined target. This high probability, the edge, is determined through a number of rules that have to be met from analyzing a given currency, commodity or stock chart. By being able to identify and repeatedly use this edge, a private trend trader aims to catch large movements over time called the trend, as much as several thousand pips, but with minimal time spent in the market.
How does the psychology of a poker player mirror that of a trend trader?
A professional poker player's psychological approach is one where he chooses to only bet on the high probability cards -- the edge -- that appear over a number of hands. He simply folds on the cards that are not. It is this discipline and consistency that not only makes a great poker player stand out from the rest but removes the emotional element when sitting at the table. Emotions will of course affect his approach and game strategy.
A private trend trader has this same psychological approach and understands that serious monetary gains are made by trading with that edge over the long term. He understands that over the course of many trades, he may have more losers than winners, but the winners, leveraged by compounding, not only cover the losses but bring home the life-changing money that most people set out to achieve but very few do. The traders who have mastered this total an unbelievable 5 percent and are called the Smart Money.
Key to this psychological approach to trading is that it allows the emotional element to be removed, namely hope, fear and greed. It is this consistent, mechanical, stress-free approach that not only brings the huge monetary gains that a trader wants, but the stress-free lifestyle that comes with it. By trading using the daily and weekly chart, minimal time is spent in the markets, maximum results are yielded and the one thing we require most of all -- our time -- can be spent exactly how we choose to. After all, who wants to spend all day staring at a screen?
Where the lifestyle of a professional poker player matches that of a professional trader is that he only plays a handful of tournaments a year, but unlike a trader probably has a jet-set lifestyle playing in tournaments and casinos around the world. He luckily also has that "wow, that's cool" factor that does not really come with trading. A top Smart Money trader, though, can afford to have the jet-set lifestyle from his massive earnings from trading.
Part 2 on Risk Management and The Winner's Lifestyle will be published in the coming days.