Parallels Between Poker and Trading

NEW YORK (TheStreet) -- When I speak to audiences about my approach to trading, I like to use a blackjack analogy to describe my approach. When you're trading, you always have to trade with an edge. You can't get to the point where you are simply making gambles, but rather you must repeatedly put yourself in favorable risk-reward situations. While you can never predict with certainty a move in a stock or market, you can limit yourself to the best setups.

In blackjack, you are dealt a hand and you have no choice but to play it. In technical trading, you get to pick and choose your hands. How great would it be if you could go into the casino, sit at the blackjack table, get dealt 10-4, and say to the dealer, "no thanks, I'll wait to see the next hand." On the flipside, if the dealer deals you an 5-6 vs. his own 10-4, you can choose how much to put on the line and double down the odds. That's obviously not how blackjack works, because in that case the house wouldn't always win.

Texas Hold 'Em Poker, I feel, incorporates many elements of trading. Any great poker player will tell you it's more about the people than the cards. A professional poker player could sit at a table of amateurs and likely win blind (without even looking at his cards). The market is the same in some senses. It doesn't matter if you are trading an oil stock or a tech stock or a financial stock, it's all about the charts and your own approach.

My approach consists of routine, discipline, money management, and confidence. Charts and price movement represent the emotions of the herd and it is a trader's job to analyze those emotions and position themselves on the correct side. For example, when sentiment gets overly bearish like we saw at the beginning this week, a smart trader can position himself for a powerful oversold bounce like we saw on Tuesday. Even more recently today, traders were able to identify relative strength from tech, make that their focus, and got rewarded with a big, late-afternoon move.

That isn't to say that you don't sometimes get a bad beat. Today, for example, many traders elected to take tech stocks into the close after that aforementioned relative strength from the Nasdaq all day, and then the Greece austerity agreement that boosted stocks late in the day. But then, after the close, Oracle Corporation ( ORCL) released lackluster guidance and tech dropped slightly as a result. Sometimes things go against you that are out of your control. Sometimes pocket deuces beat pocket aces when a 2 comes down on the river. But in the long run, the player who makes the best-calculated moves will come out ahead.

In an article in Business Insider, I am lumped in with a pretty elite crowd in the financial community, talking about the parallels in poker and trading.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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