Wednesday, December 29, 2004

Trading vs. Poker

Many poker players come from trading backgrounds - Chris Ferguson, Alan Goehring, Erik Seidel to name but a few. For those interested, following is a list I compiled comparing a trade to a hand of poker.

Similarities between a trade and a hand of poker

(1) The outcome of each is uncertain.

(2) Both are zero sum games, ignoring commissions, rake etc. (Assume futures)

(3) At any time, a trader may elect to stay out of the market, and a player may elect to stay out of a hand, at no cost. (Blinds, antes, like software and DSL costs, are assumed to be running expenses. Or alternatively, the player may elect to leave the table.)

(4) It is possible for both trader and player to benefit from information gleaned about his opponents.

Differences between a trade and a hand of poker

(1) In a trade, the opponents and their numbers are unknown. In a hand of poker, the opponents and their numbers are known.

(2) Once a trade is initiated, a trader can do nothing more to influence the outcome of that particular trade, unlike a player who, because of the betting structure, may influence the actions of other players and hence the outcome of the hand.

(3) A trade, once initiated, may be closed out at any time only by the trader. A hand of poker, once initiated, may be prematurely completed by the action of the player eg. he folds, or by the action of others eg. everyone else folds.

(4) Unlike a trade, a hand of poker has a fixed, predefined length.

(5) A trade may be "prematurely" closed for either a profit or loss by the trader. A player can only prematurely complete a hand for a loss.

(6) At all times during a trade, the P&L is uniquely and unambiguously defined. At all times during a hand, the player's equity in the pot can only be subjectively estimated using incomplete information (in most instances).

(7) As a corollary to (6) above, the intra-trade equity curve is generally smooth and continuous, while the intra-hand equity curve is jumpy and discrete.

(8) As a corollary to (7) above, a player will encounter many "bad beats" with their accompanying psychological pain. A trader will rarely see profits snatched away from him so suddenly; his pain is of a more gradually built-up nature.

(9) A trader may predefine profit target and stop loss. A player will have different losses and profits depending on the particular hand. In fact optimal play negates the notion of a stop loss.