Wednesday, August 19, 2009

Poker vs Trading

After trading a certain range at today's open, I saw some similarities between poker's value betting and bluffing concept.

When you hold a hand in poker, there are times where you're hand is definitely good and you want to get the maximum value from your opponent in the form of value betting; in the market this is where you buy at the bottom of the range in a trending markets on long side themes.
However, many times people fail to get full value because they don't bet enough chips, scared that the opponent might fold their hand (this is like not riding the trend to maximum potential, scared that you think the market might turn against your profits)

However there are times where you're hand isn't a guarantee, and sometimes you're pretty sure that you're beat - but there are probabilities of betting hard enough, that you can sometimes get you're opponent to laydown the hand; in the market I believe this would be the equivalent of fading the trend at key resistence levels or trying to find absolute turning points in the market - there is no real economic thesis for why people would decide to sell at that point - but the 'scared money' will ultimately 'fold' at certain price points, and this is where you're betting your capital that players will fold and prices will reverse.

In poker, to identify what type of opponent you will encounter is an integral component to playing your hand optimally - against weak opponents; you will bluff more (in range bound markets, you want to fade prices) and against opponents who never believe that you have a hand, you want to value bet as much as possible (riding the trend to full potential in a trending environment).

Identifying your opponent is like identifying market conditions, and how you play your trades, is like whether you play your hand in a bluffing or value betting manner. Without identifying you're opponents, you are most likely trading sub-optimally and this will lead to regret (not winning enough chips or because he calls your bluff) through hindsight bias.

Remove hindsight bias, and concentrate on insight into your opponent (market) and foresight into probable outcomes.