Poker or gambling in general has very interesting correlations to trading. In both you are dealing with uncertainty, the ability to handle your emotions and how well you manage your money.
And doing all of those things gets back to discipline and your ego. Let’s start off with knowing when to fold ’em as they say in poker or as they say in trading…cutting your losses. Some good basic rules of poker apply to trading.
Know When to Fold ’em
Rule 2 from the Tao of Poker: If you think you’re beat, get out. “This is one of the basic rules of poker, but one that is – for some reason – easily overlooked or forgotten.
If you’re beat, fold. And listen to that little voice telling you that you are beat. Hanging on (and on, and on) in a hand is where a lot of the money goes.”
Of course it is similar for trading. This gets back to the concept of having a stop on the position and knowing where you are wrong in the trade. There is nothing worse than when you are in a losing trade and it keeps going against you.
I talk about this in my eBook “7 Keys to Successful Option Trading” (download for free below”. The principle holds for anything you are trading whether it be options, stocks, currency or commodities.
“You always told me this was…rule number one: Throw away your cards the minute you know you can’t win. ‘Fold the f—- hand…’”
– Kevin Canty, from the movie Rounders
Ego
The following is an excerpt from an interview by Jack Schwager of Marty Schwartz, a.k.a. “Bit Bull” in Schwager’s book Market Wizards.
[Schwager] Why do most traders lose money? [Schwartz] Because they would rather lose money than admit they’re wrong. What is the ultimate rationalization of a trader in a losing position?“I’ll get out when I’m even.”
Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say,
“To hell with my ego, making money is more important.”