5 Similarities Between Profitable Day Traders And Professional Poker Players
I was having fun talking to an old friend who has been playing poker professionally for many years. He is one of those players who consistently making money from playing in poker halls and tournaments but seldom show up in the final tables. During our conversation, he raised the issues of player statistics and how the top players all play similarly statistically speaking. Even more interesting, he thinks the statistical behaviour of the professional poker players is very similar to consistently profitable day traders.
I did some research on the subject and can now confirm what my buddy told me is true. Here are 5 similarities between the professional poker players and profitable day traders that no one pays attention to.
Similarity 1: Very Selective
Non-professional poker players play at least three out of five games.
Professional poker players play only one out of five games.
The figure goes even lower to one out of ten during major tournaments. What it implies is that the professional poker players are willing to bleed chips until the right combinations show up. It is not just your hand that matters. It also depends on what is showing on the table at the time including the behaviour of your opponents and the cards that are visible on the table.
Profitable day traders are doing exactly the same thing when they trade.
Good day traders have the patience to wait for the right setup. More importantly, they scratch when the scenario is unfolding in ways reducing the predictability of the outcomes. In this sense, profitable day traders scratch as many trades as the number of games that the professional poker players give up in tournaments.
Beginners in day trading do not understand that scratching is perfectly valid and necessary as long as the decision is not made due to emotional influence. Having brass balls holding onto your trading mistakes does not make you a good trader. Having the courage to admit that you are wrong will allow you to focus on what is more important – the next trade.
Similarity 2: Well Prepared
Professional poker players are busy. When they are not taking a break they join as many tournaments as they can. It is not that they like to gamble. They understand that the more you play, the more likely the law of large numbers can work for you. They treat their poker games very seriously like a regular business.
Professional poker players also keep up their skills by studying the odds in various scenarios so that they are prepared in handling them when they encounter these difficult situations. It is not how well a poker player playing a perfect hand that counts. It is how well a poker player handles the difficult scenarios to stay out of trouble that protect their bottom lines.
Profitable day traders also use their time wisely when not monitoring the markets in real-time. They conduct research, review their own performances and keep up with latest financial world developments. The time and effort spent help these day traders stay competitive.
Similarity 3: Consistency
The statistics on professional poker players are very consistent. The top players all ended up behaving very similarly if only performance metrics are compared. In other words, the style of a professional poker player does not matter much on pure performance sense. The net winnings may vary a lot among the top players. But that is caused by the limited number of major tournaments available in comparison to the number of active professional poker players.
What this means is that the professional poker players have their emotions under control most of the time during tournaments. They understand that they have no control of the cards in each hand but they can control their responses to management the impact of the game on their overall performance. Hence they try their best not to invest too much emotion into any particular hand they are playing which allows them to perform more consistently.
In essence these professional poker players function like machines during the games. All the odds and scenarios are recalled from memory during the games to minimize guesswork. Many amateurs who have the luck to play against these professionals describe their encounters as facing the Terminators.
Majority of traders do not realize that they have no control over the markets they trade. There is no such thing as certainty in the markets similar to what the poker players are facing. Great day traders are well prepared like the professional poker players that they do not really waste any time analyzing the markets while trading. They merely execute their plans. This reduce their chance of making mistakes and promote consistency in their performance.
Similarity 4: Beat The Amateurs Not The Game
Professional poker players prefer large scale tournaments over the small scale ones. The main reason is that it will reduce their chances of facing very strong opponents in the first few rounds of the tournaments. The more amateurs in a tournament, the more likely the professional poker players can rank higher among the participants. Higher ranking alone means the odds of getting payout is greatly increased. Professional poker players are looking for income from the tournaments, making a killing is just bonus.
Profitable day traders understand that financial markets are like American football where the participants are all part of the game. It is not how great you are in absolute terms that matters. It is how weak your opponents are relative to you that allows you to beat them.
Hence good day traders seek for markets with better liquidity to find good trading opportunities. What it really means is that they are looking for higher concentration of amateurs to take advantage of.
Similarity 5: Profitable Excluding Outliers
Out of all the tournaments a professional poker player played, getting to the top 10% in a tournament only happens 10% of the time. It is long term statistics though. If you only look at a short time window (e.g. yearly), you may find some of these professional poker players getting to the top 10% in 30% (or even more) of the tournaments participated.
The winnings from those top 10% tournament winnings contribute approx. 50% of the winnings the professional players make. The other 50% of their winnings coming from the 50% of tournaments they participated in where they land at the top 50% but not making it into the top 10%. In another words, the professional poker players made money from 60% of the tournaments they participated in. They lose the buy-in in the rest of the tournaments they played.
What separate professional poker players from amateurs in terms of profit distribution?
- professional poker players can net positive without the winnings from the exceptional top 10% winnings
- professional players have 10% chance of getting to the final table while the amateurs stand at one percent
(Note: Since I cannot gather statistics on professional poker players whose specialty is poker hall cash games, I cannot tell if the same statistics is applicable to them.)
Good day traders are profitable without the glory trades nor the home runs. Make no mistake, those winnings add much to the bottom line similar to the professional poker players. But one has to realize that these winnings happen by chance thus one does not necessarily get them regularly. Good day traders can make sure their trading styles will allow them to capture the exceptional runs when they happen but that is all they can do.
My friend pointed out that the professional poker players is an ever increasing crowd. It has been steadily increasing ever since the internet and TV popularize poker games. It used to take training partners and many face to face games to horn your skill. Now, if an individual is dedicated enough by memorizing the thousands of scenarios with the related odds in a particular poker game and improve skills through playing online pokers, one can become a professional in a few short years.
The problem, however, is that the big money is concentrated in major tournaments. When there are more professional players playing them, the less likely one can get to the top 10% for the major payouts. The retirement age for professional poker players is quite high as peak performance of the brain is not as brutal as physical intensive activities like sports. Hence the number of professional poker players will keep increasing and dilute the prizes unless more major tournaments are created with more prize money.
Professional poker players can always choose to play the poker hall cash games. The upside is more limited but you have the advantage of anonymity and flexibility with your work schedule. The downside is that you need the extra skillset to control your winnings so that you do not upset the crowd who feed you.
For day traders, since way too many participants are delusional with magic top and bottom picking techniques, the increase in number of profitable day traders is not as fast as the professional poker scene. The complexity of the markets blinds people from accepting the facts that price movements in all markets boil down to the order flow. Hence the financial industry will always find ways to talk their books and line their pockets at the expense of the ignorant public.
As financial markets worldwide keep growing in size and variety, the good day traders are getting more ways to stay profitable and more chances to make good money. In terms of future outlook, being good at day trading has more upside potential than professional poker playing.
Identifying Online Professional Poker Players: A Revealed and Stated Analysis Approach, Kahlil Philander, Brett LL Abarbanel – 2011
Poker Superstars: Skill or Luck?, Rachel Croson, Peter Fishman and Devin G. Pope
Quality of Professional Players’ Poker Hands In Perceived Accurately From Arm Motions, Michael L. Slepian, Steven G. Young, Abraham M. Rutchick and Nalini Ambady
What’s It Like To Earn A Living Through Poker?, Michael Shinzaki