21.0 Stock Trading and Poker

I love Poker not because I am an addicted gambler but because Stock Trading and Poker are pretty much alike. Poker betting terms like "call", "check", "raise", and "fold" are equivalent to stock trading terms as "bid", "hold", "jockey", and "cut loss".  It is so alike that I practice my emotional control and derive some of my trading strategies through the lessons learned from playing it. But that is going ahead of the story.

Once a month, my six friends and I gather to play poker - probably the most intelligent and exciting card game ever invented. Two are lawyers who are partners in their own respective firms, one is a managing director of the shared services arm of the world's leading chocolatier, another is an extraordinary salesman of electric generators who counts the Manila Cathedral, the top 3 banks, and El Nido resorts as clients, the other works for the BIR, and the sixth is the wife of one of the lawyers who is completing her master's degree at the State University. And then there is me - banker, philanthropist, playboy (joke only), turned stock trader. One of these players is a certified poker master who has already won a championship game at a poker club somewhere in the Metro. But that is not me. I am referring to one of the lawyers.

While we are the best of friends, we are all merciless combatants at the poker table. While that may be the case, we all leave and call the night as better friends savouring yet another opportunity at enjoying each other's company and "cutting each other's throat" and, of course, the winnings that come with it. To the losers, there is always the hope of winning in the next encounter and that hope never fades despite the grieving protestations of our better and bitter halves.

One of the “benefits” I learned from playing poker is mind reading which is the ability to detect the strength or weakness of the players' hands through body language, verbal communication, eye movements, facial expressions, as well as betting patterns. In stock trading, it is like having that unique ability to read market sentiments from news about global and domestic economic affairs, corporate disclosures, chart patterns, volume traded, and price action, among others. It is a continuing lesson because serious poker players have the ability to maintain poker faces as well as confound you with bluffs. In the same manner that reading market sentiments can be made difficult when domestic and global events run in opposite directions, and when the market is inundated by rumours and gossips, false information, padded volumes, and price manipulations.

In poker, if you bet more often chances are that you are going to lose. Betting frequency does not determine more positive outcome. What determine positive outcome is the number of outs your hand has versus the number of outs the other guys have. The same can be said in stock trading in even greater magnitude. The more frequent you trade, the more you are going to lose. The reason I say "in even greater magnitude" is because in stock trading you are actually trading with not six or nine individuals, as in the case with Poker, but with thousands or even millions of traders across the world. If you have been watching World Poker Tour (WPT), the players normally do not bet so often even laying down cards that for me have good chances of winning. Now tell me, if this is not the case.

One of the questions often asked is when to buy stocks or raise a position in a particular stock? That is the same question you face in Poker, "When do you call or raise the bet?" In Poker, the answer is the number of outs as above-stated. In stock trading, you buy stocks or raise your position in a particular stock if you have a high probability trade. A high probability trade happens when all your selected indicators confirm each other and there is a positive disclosure about the company. This is regardless of whether the overall market sentiment is up or down. Of course, this is discounting bluffs in poker or hype and dump in trading or the opposite of it.

I learned a valuable lesson from our Poker Master when he said that if you want to win big in Poker knowing what you have is far lesser in importance than knowing what others have. That is very true indeed because you are not playing by yourself but against everybody else in the table. When I was still new in this game, I always committed this mistake of thinking only about my cards and disregarding what my opponents have. He said to me that studying betting behaviours and patterns as the cards are shown on the flop, turn and river will give you indication about what the others have. In stock trading, it will certainly pay dividends if you keenly watch the price action and volumes of bids and ask. If you notice buying or selling pressures always try to learn what is going on from corporate disclosures or from your brokers if you can.

I can go on and on but I will stop with this last lesson – “Learn to cut your losses”. When I was new in both Poker and Stock Trading, I played and traded with a stubborn determination not to fold or cut my losses even when it was already apparent that the tide was going against my favour. My pride in not admitting I was wrong had the better part of me. I kept telling myself that the right card would show up in the river or that the price trend would soon reverse. But it did not . . . until it was too late. Cutting losses is a bitter pill to shallow but this will save you a lot of trouble down the road. It is foolhardy to consider paper losses as just only on paper. Believe me, a paper loss is as real as it can get.

Now, here is a bonus lesson from the game of Poker, “Poker takes a day to learn but a lifetime to master.” Let those who have ears hear this, “Stock Trading takes a day to learn but a lifetime to master as well.” Do not be a fool to think you can beat the market all the time. The market is like the enigmatic Monalisa, “many men have fallen on her doorstep.” However, please do not let this dampen your appetite but let this serve as a guiding lesson to dampen your losses instead. Now, onwards my fellow stock traders and poker players to the greatest inventions ever created by man –Stock Trading and Poker.