Picking good stocks is only the first step to become a consistently
profitable trader. Those of you that track the performances of stock
picks I post on http://www.cisiova.com/analysis.asp know that it is
impossible to determine if a stock is good without a good exiting
strategy. And for most traders, exit strategy is the hardest part. Many
people say that to trade profitably you need to develop the right
mentality. Unfortunately, such winning mentality can only be developed
through experience. However, there is a short cut to get through the
learning curve without throwing thousands of dollars in the process.
This short cut is playing POKER.
Yes you heard me right. Apparently, playing poker has a lot of
similarities with investing in stocks. First of all, they both deal
with money, uncertainties, and a keen judgment of potential risk and
reward. In this article I will explain the similarities and differences
between stock trading and poker. But before proceeding, make sure you
know the rules of Texas Holdem and fluent with the terminologies.
Think of stock picking as looking for good hands to play. In Texas
Holdem, you can look at the two hole cards and decide whether you can
play the hand or not. Similarly, you can analyze the stock before
entering a position. Fortunately for you traders, no one will raise
pre-flop, so you just pay the commission. Remember to exit the position
you also need to pay the commission, which implies that the cost of
entering a position is two times the commission. Good poker players
only play good hands, so you should do thorough researches before
entering a position. One good thing about trading is that you do not
have to wait for good stocks like poker players wait for good hands,
you can find good stocks on stock picking websites or using screeners
to find them yourself.
Once you call the blinds in poker, you get to see the flops and two
more cards. Think of these cards as the performance of your stock after
you enter the position. In poker, the flop can make a good hand, a
medium hand, or a bad hand (by helping your opponents). In trading, you
can observe the potential of the stock as well, and you should
objectively judge the downside and upside potential of the stock. In
poker, there are times that you have a good hand, and your opponent
have a better hand, and you know you are beat. These are the times
where your mentality matters the most. An experienced poker player will
fold his hand regardless of the amount of money he has put into the
pot. As a trader, at times that you think the upside potential fails to
actualize, you should sell the stock regardless of how much you have
lost. On the other hand, when a good poker player knows he has the
winning hand, despite the possibility of losing at the river, he would
bet aggressively, without fearing the small losing possibility. In
trading, this translates to if the stock goes up and manifests higher
upside potential, you should not fear that you will lose your recent
winnings. Therefore the winning mentality is to ride when the stock is
going up, and sell when the stock is losing its heat. This discipline
is easily said than done. So many times I have heard people lost all
their money because they hold on to losing positions (due to hope) and
sell winning positions too early (due to fear).
By playing poker, you would get the chance to master your emotions,
learning not to hope when you are beat, and not to fear when you are
favorable to win. You want to lose small and win big, not the opposite.
Now go practice. This mentality only develops with experience.
