Never Drink at a Vegas Table

Boris Schlossberg

Molly’s Game is a movie that has nothing to do with the markets, but every trader should see it, for this one scene alone.

The movie centers around a life of brilliant Olympic skier, who after a career-ending injury, stumbles into the world of high stakes poker, running games for various celebrities and businessmen in LA and then NY. In this one scene in the movie, a very good poker player gets bluffed by the worst player at the table and completely loses his composure. The poker term for it is “going on tilt”. He starts gambling wildly desperately trying to get his stack back.

It’s truly painful to watch as loses hundreds of thousands of dollars on one bad play after another. Although the scene has nothing do with the markets, it instantly resonated with me as I remembered all my own moments of going on tilt after the vagaries of the market got the better of me. Just one bad fill, a to-the-pip stop that then went on to hit take profit, or one just missed take profit that then went on to stop me out were often all that was needed to trigger a nasty bout of revenge trading that left me considerably worse off than I was before. Molly’s Game will be forever seared in my mind as a testament to the fact that no matter how well you know the game, the true enemy is not the market but your own psyche.

All throughout the scene, Molly is begging the poker player to walk away from the table, but of course, he refuses. This made me think about Vegas and the fact that they love to serve you free drinks on the casino floor. Why do you think they do that? Because they know that the longer you stay at the table the greater the chance that you will give back all your winnings and your starting bankroll as well.

The market is very much the same way. It’s not that most of us can’t win at trading, it’s that most of us can’t keep the winnings we make because we stay at the table too long.

For the past few weeks, I’ve been running a continuous trend EA desperately trying to make it work on a 24-hour basis. The setup was extremely sound but inevitably it gave back all of its winnings on the very last trade of the cycle as it sold the lows or bought the highs. Regardless of the safeguards in place, the EA could not apriori anticipate the change of market regime. Finally, I realized that no EA ever could. That’s why in the history of all EAs there has never been a continuous EA that has ever made money, because as I’ve noted a million times, all algos are simply divided into two types of strategy -- continuity and mean reversion and for an EA to make money continuously would be like saying that a person can sleep and be awake at the same time ( side disclosure -- when I was younger I used to sleep with my eyes open, which freaked out more than one of my camp bunkmates, but that is not the same thing).

Anyway as soon as I realized that the problem with my setup wasn’t the strategy, but the fact that I kept running it too long, I changed my tactics completely and made my EA single trade only, entering the market only when evidence of a new trend was appearing. In a sense I started trading like a good poker player, entering the game only when pot odds favored my cards while perfectly willing to sit out any hands that did not meet my criteria.
End result?

+99.1 pips in live trading on BOE Rate Announcement day in less than two hours of stress-free work.

Great Lessons On Trading From a Poker Pro

Boris Schlossberg

This week Business Insider had a great profile of a professional poker player called Andrew Seidman. He has been playing the game since 2006 and has had massive success as well as some setback since then -- but perhaps what makes his story so compelling is that he is basically a regular self-taught guy rather than some Mensa math genius. I am taking the liberty of snipping parts of the interview (.. so apologies if some of the quotes appear as though you’ve entered the room mid-sentence) and affixing my own comments to his observations.

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On capital and law of large numbers
“However, it doesn’t usually work that way. Usually people play with 20-40 times the buyin, well within a risk-of-ruin scenario in which a person could just get crushed by luck and bust out. Also, sample size matters. Can I go to Vegas and be assured of a winning weekend? No. Can I move to Vegas and be assured of a winning year? Probably.”

Divide the “20-40 times buyin” line and you quickly come up with 5% of 2.5% bet size. This very close to what professional traders use to size their own trades. In fact I would argue that in FX you would want to be even more conservative and use 1%-2% risk limit per trade. Why? Well as Seideman explains by chopping up your bet size to small chunks you stand a better chance of avoiding risk of ruin -- a situation where the market, or the cards simply produce a very long string of negative outcomes.

Next. Size matters. In FX and in poker the more trades/bets you take the less likely you are to fall victim to a bad string of outcomes. Mind you if you strategy in trading or in poker is flawed from the outset, you will still lose. But if your probabilities are accurate the longer you trade/play the more likely the outcome will line up with expectation.

Good trading/playing means knowing the probabilities as well as the behavior patterns of your opponent.
“First, you have to psychologically profile your opponent (everyone fits into one of three general profiles); second, you have to understand basic probabilities (e.g. if I have two pair and my opponent has a flush draw, I win 65% vs his 35% and these are relatively easy to memorize); third, you have to predict your opponents likely holdings.”

What’s absolutely key about understanding this passage is that Seidman not only focuses on the basic probabilities, but on the likely reaction of the opponent. That’s why just knowing the news in FX is never enough. You have to understand if the market is ready to accept the news ( its in a momentum mode ) or reject the news (it in a mean reversion mode). Profiling the state of the market is just as important as acting on the immediate newsflow.

Adjustment is key
“Good poker players go through all of that process and are really mentally engaged trying to determine those things. Weaker players really don’t do any of that and make purely emotional decisions (conservative players never really bluff, crazy gamblers basically always bluff, etc.)”.

This is SUCH an important point. Good traders/players always continue to learn and observe adjust their strategy within a properly designed framework. Bad traders simply repeat their emotional behavior over and over until they are bust.

Last but not least -- successful players compete with those who are weaker than them. This is a very common mistake that retail FX traders do all the time. By trying to trade right after the news retail traders are playing against much stronger opponents and institutional algorithms shred them to bits as a result.