Many parallels can be drawn between the stock market and poker. In fact, some poker pros, like 3-time WSOP champ Vanessa Selbst, have moved on to become professional investors.
Poker and the stock market are relatable because they both involve skill, bankroll management, and risk assessment. The best traders and investors also make long-term profits.
Given these similarities, poker players can gain more insight into the game by taking lessons from stock traders.
I’m going to explore this topic by looking at 5 stock market lessons that apply to poker.
Volatility is an important concept in both investing and poker. This refers to how much short-term results fluctuate versus the mean average.
For a poker player, volatility measures how much their results will deviate from their abilities.
A skilled poker player wins profits most of the time against inferior competition. But they’ll also lose occasionally due to bad luck and a poor run of cards.
Nobody is better at dealing with volatility than stock market traders. Stock prices rarely climb and fall in straight lines. Instead, they zigzag over the short term and look like mountain ranges on a graph.
These graphs feature smoother lines and look less volatile over a period of several months. But those who trade on a daily/weekly basis must be able to handle short-term volatility to be successful.
The reason why stocks rise and fall so much in the short run is due to human emotions and opinions on different companies and the overall market.
If investors feel good about a certain company and/or the economy, then prices are likely to rise. But if there are rumors of an economic downturn or a company struggling, the prices will suffer.
It’s hard to predict the rises and falls that happen because of unforeseen news and events. You might invest in a company and see the price plummet the next day when the CEO announces that they’re stepping down.
Some investors take these quick price movements as a sign that you need to either buy or sell. This leads to a herd mentality that can accentuate an already rapidly-changing price.
Many people deal with this volatility by becoming long-term investors, meaning they buy into a company and ignore the day-to-day price fluctuations. This is a good strategy for professional and amateur investors because the price of an established company generally rises along with the market.
Day traders have it even tougher because they need the skills to buy in and out of stocks at the right times. One of the best skills that a trader can have is being emotionally detached from each investment they make.
long-term and day traders.
You want the mindset of a long-term investor when looking at your poker results. Players can show a big win or loss rate over the course of a few hundred hands.
But your true poker results won’t be accurate until you’ve played thousands of hands. Therefore, it pays to think like a long-term investor and ignore short-term fluctuations.
The same can be said when thinking like a day trader because they’re so good at putting wins and losses behind them. You should do the same with poker and avoid dwelling on a single session.
The key to lasting success in poker over any measurable time period is bankroll management. Properly managing your money helps you survive short-term volatility and improve your win rate as you become a better player.
Investors don’t commonly refer to their funds as a bankroll. But they indeed manage their money much like a successful poker player does.
This means that you can draw from how an investor manages their money. After all, they must be disciplined enough to avoid taking too much short-term risk so that they can realize profits in the long run.
A common investing strategy involves diversifying your portfolio over multiple assets. This helps you manage risk in case one or more of your favorite stocks don’t pay out.
Of course, there’ll be times when you see an investment that seems like a guaranteed thing. But it’s important to realize that anything can happen, which is why you want other investments to fall back on.
The same principle applies to poker in that you may find a juicy cash game with multiple fish. You don’t want to pour your entire bankroll into a single high-stakes game and risk losing everything, though.
A good way to handle bankroll management is by dividing your funds into 30 max buy-ins.
Here’s an example:
You have $3,000 $3,000 / 30 buy-ins = $100 You can play any no-limit cash game with a max $100 buy-in Cash game buy-ins normally have 100 big blind maxes $100 / 100 big blinds = $1 big blind You can play at no-limit stakes of $0.50/$1 or lowerYou should avoid playing no-limit cash game stakes that you don’t have 30 buy-ins to cover. Once you start winning more money or can add to your bankroll, you can consider moving up the stakes.
Day traders also offer a good lesson on managing your poker bankroll. Pro day traders normally don’t put any more than 1%-2% of their funds into any single trade.
Day trading is far more volatile than long-term investing. The best day traders usually only make a profit on 53%-55% of their investments.
Therefore, they need to do everything possible to spread out their risk and avoid losing too much on a single trade. The 1%-2% strategy works well to accomplish this goal.
I liken day trading to poker tournaments, which are also very volatile.
You buy into a poker tournament and get one chip stack. But losing just one all-in hand will bust your stack and eliminate you from the tourney.
Another thing to consider is that only 10%-15% of the entrants cash in a tournament. And most of the prize money is at the very top of the tourney (i.e., 1st, 2nd, 3rd, 4th, and 5th place).
This means that the average player is losing over 80% of the time. Even elite poker players struggle to cash on a consistent basis at this rate.
You absolutely must have a good bankroll management strategy for poker tourneys. A good way to do this is by playing at stakes where you can cover 75-150 buy-ins.
The reason for the large range here is that other factors influence how large of a bankroll you need. This is especially the case with big multi-table tournaments, which can be more volatile than smaller events.
Here’s an example of how you can do bankroll management for poker tournaments:
You have $1,100 You want 100 buy-ins 1,100 / 100 = $11 Poker tournament buy-ins normally add an extra 10% as a fee Therefore, you can play in tournaments with a $10 + $1 buy-in or lowerOne of the most frequently-discussed topics in poker is tilt, or the emotional state that players enter where they make poor decisions.
Several things can send a poker player into tilt, including a bad beat, annoying opponents, a bad run of cards, or problems away from the tables. Whatever the case may be, you want to do everything possible to keep yourself from tilting.
Common suggestions to avoid tilt include taking a 10- or 15-minute break from the table when you’re getting emotional, taking 3-5 deep breaths to clear your head, or simply quitting for the day.
Of course, you can’t look at just any investor when seeking advice about handling emotions. Unsuccessful investors have a knack for buying at the top and selling at the bottom.
This is obviously the last thing you want to do, because you’re buying at the worst price and selling to other traders at the best price.
But it’s easier said than done to avoid doing this when considering the media hype and forum suggestions that many investors fall for.
Good stock traders don’t let the media and general consensus control their decisions. They’re also able to avoid some of the common emotions that creep into investing.
Billionaire Warren Buffet famously said,
and greedy when others are fearful.”
This a great quote for investing, because fear and greed are two of the biggest emotions that traders deal with. This is especially the case with beginning investors, who commonly switch between fearfulness and greediness.
Just imagine being a beginning investor who completes your first trade. Your rush of excitement can quickly turn to panic upon seeing the stock price drop 8% over the next 24 hours.
An inexperienced investor will begin panicking over if they should sell, even when there’s no clear evidence to support the current price drop.
Likewise, a new trader could invest into a stock that quickly takes off. This same trader is likely to continue holding onto their investment as it continues rising in value.
They may dream of a 50x or 100x increase and everything that they’ll buy with the profits. But skyrocketing profits rarely continue, and many investments begin dropping almost as soon as they rise.
If you don’t sell shares of a rapidly-rising stock along the way, then you’ll get burned more times than not.
Here are other emotions that stock investors must learn to manage:
Frustration – Traders can become frustrated with a slow-moving market. Sometimes bear markets can last months, but you need to stay focused and avoid making any rash decisions. Laziness – Far too many investors avoid doing the necessary work to make successful trades. Keep learning investing strategy along the way and researching companies so that you improve. Patience – Realize that 5x gains don’t happen daily. Be happy with short-term gains, and work your way up to a larger portfolio. Self-doubt – Be confident in your trades, especially if you’ve put plenty of research into the matter. Develop a plan, and don’t overreact to a quick change one way or the other.Again, the key is to distance yourself from these emotions as much as possible when making investments. Many investors diversify their portfolio across multiple assets to remove some of the emotional aspects of trading.
Another effective technique is called dollar-cost averaging (DCA), where you buy a predetermined number of shares during a certain point of the week/month.
Those who use DCA commonly buy more shares in a bear market and less in a bull market. The idea is to bring your overall investment cost down over time, rather than dumping a lump sum in at once.
Poker players don’t have anything like DCA to control their emotions and investments into hands. But I’ve found that meditating is a great tool for keeping a level emotional state hand after hand.
Meditation helps you better deal with negative emotions and center your mind. This allows you to concentrate during poker games and remember that volatility happens.
The best part is that you don’t even have to meditate very long to get the benefits. I started with 5 minutes per day and saw a noticeable difference over time.
The easiest way to meditate is by focusing on your breathing and nothing else. Gently pull your mind back every time that it begins to wander to thoughts beyond your breathing.
Focusing on this one thing helps you to concentrate on the task at hand. You’ll find that this skill is especially helpful for poker, where your mind can wander when you’re no longer in a hand.
Great poker players pay attention to the game at all points so that they can make important observations on opponents. And meditating will keep your mind in the game so that you can pick up useful reads on opponents.
It’s hard to fold poker hands when you have a lot of money invested in them. And players often tell themselves things like “I’m pot committed” or “the opponent could be bluffing” to avoid folding on a later street.
If you’re having difficulty laying down cards on a later street, then you can look at how stock traders handle a bad investment.
For example, a successful investor could spend hours researching a company and its management team. They may come away satisfied that the company is poised for growth and put 5% of their funds into shares.
But over time, the company fails to become profitable and realize their vision. As of this point, the investor can either ignore the facts and continue hoping for the best or sell the investment and look for a new asset.
Another example includes a day trader who buys in at a certain price, only to watch the investment drop 10% over the next several days.
Many day traders have a stop-loss limit that they use to determine when to sell a failing investment. A poker player doesn’t have a stop-loss for hands.
But what they do have is information on their cards and whatever they’ve collected on an opponent’s tendencies. Here’s an example:
You have Ah-Kh The board on the turn is As-8d-6d-3d Your opponent is tight aggressive (TAG) They make a pot-sized betYou could try to convince yourself that they didn’t get a flush and are instead bluffing. But given that they’re a TAG player, odds are that they’re betting because they landed a flush.
Much like how good stock traders know when it’s time to sell a bad investment, you need to let a hand go when you’re beat.
Investors use a risk/reward ratio to compare potential returns from an investment to the risk. Traders calculate this ratio by dividing the risk by the amount they hope to earn.
The optimal risk/reward ratio varies based on the exact strategy that a trader is using. A generally-accepted ratio is 1:3, where 1 is the risk and 3 is the profit.
You might think that this is a high profit margin. But it’s also worth noting that some stocks can be more volatile than others, meaning the investment is more likely to be lost or diminished.
The idea is to compensate yourself fairly for risk assumed. Some of your trades won’t work out, which is why you need the successful ones to pay off when they do.
This is another area where traders use stop-loss limits to control potential losses. They can place a stop-loss order at a specific price to avoid going too far in the red if things don’t work out as planned.
Here’s an example:
You buy 100 shares of a company at $30 ($3,000 total) You set a stop-loss order at $24 This limits your potential losses to $600 You at least keep $2,400 of your funds if this happensPoker players need the same type of skills that a risk/reward ratio supplies to mitigate risk. A perfect example is bet sizing, which is used to both manage risk and capitalize on a good hand.
You should always have a goal when making a bet. Here are examples of different goals that you may have when betting:
You have the nuts and want to gain the most value possible from your opponent You’re bluffing and want to push your opponent out of the pot without risking too much You have pocket queens preflop and want to isolate a single opponent on the flop You have the second-best hand on the flop and want to value bet without risking too muchAll these scenarios require different bets to meet your goal. Here’s an example using the preflop queens situation:
You bet 3x the big blind This is just enough to make most players fold But it’s also small enough to where a single opponent with a good hand will consider calling 3x the big blind is low enough to where you can fold without losing much if an opponent is representing aces or kingsYou constantly need to measure risk vs. reward when playing poker. And bet sizing is a good way to ensure that you do this properly.
Stock market trading and poker require different techniques to be successful.
For example, dollar-cost averaging can help you in investing but not poker. Likewise, pot odds and implied odds can help poker players but not traders.
Nevertheless, many of the same general skills that make investors successful can also be applied to poker.
Bad stock traders have the skills to measure risk and reward, overcome volatility, manage their funds, control their emotions, and fold a bad investment.
Poker players need the same traits to succeed, especially with regard to understand volatility, managing one’s bankroll, avoiding tilt, folding bad hands, and betting with risk/reward in mind.
One of the greatest parallels between great poker players and investors is a constant willingness to improve. Nobody beats poker or the stock market by sitting idly by and relying on wishful thinking.
Instead, you need to regularly study strategy, whether you’re investing or playing poker.
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