Although I'm mostly using this blog to answer interesting questions that I get asked, trading and poker is one of my topics. And I just came across an amazing book. It's called the Mathematics of Poker. Its the first book I've really seen to emphasize game thery and poker. And, although I haven't read it yet, I believe that anything who reads (and understands) what it says will have a huge edge in the game of poker.

Bu that's the rub..its not easy reading. I skimmed it and it reads like a math book. However, several things fascinated me by it. First, it said that the "QUANTS" have taken over the trading business using information like this.

"In the same way that quants and mathematicians took over Wall Street in the late 80s, mathematical methods witll dominate poker for years to come." Jeffrey Yates, Founder, Susquehanna International Group.

But I don't know of any books related to a statstical, probability approach to the markets except my own. Thus, this book may be great for understand the markets better. That is certainly one of the reasons I'm going to be reading it.

Bill Chen, the mathematician author, won two World Series of Poker events last year. And both authors are professionals who cashed in on many events in 2006 (I don't know about 2007). And this book isn't really giving away secrets because few will understand it.

Posted by Van K Tharp at 07:02 PM | Permalink | Comments (0) | TrackBacks (0)

I put this post under the heading poker and trading but it could just as well go under the heading of trading psychology.

Start thinking of your trading in terms of statistics and probabilities. I've already given you a good idea of how to do that on other posts. For example, if you think about your trading system as an R-multiple distribution, then you can simulate it and (to the extent that your sample of R-multiples is accurate, reliable, and representative of your system's performance) determine what to expect from it in the future.

When you do such simulations you'll learn, for example, that if you have a 50% system, then in 100 trades you'll have a losing streak of 5 in a row for certain (100% probability). You'll have a 10% probability of a losing streak as long as 9 in a row. You'll have a 1% probability of a losing streak as long as 12 in a row. And you'll have a very slight chance of a losing streak (in those 100 trades) as long as 20 in a row.

I have not seen many long losing streaks in my trading lately, but I certainly have in poker. In fact, one just occurred in a very short period of time. It wasn't a time in which I was making a lot of mistakes (as best I can tell), it was just a time when "luck" (or probability) was against me. I had a period in which I probably went through 30 games in a row without making money (i.e., meaning I lost my stake for that game).

For example, I don't like to put my tournament life at stake (i.e. go all in) unless I'm almost certain of winning. However, my preference doesn't always (or even usually) dictate the situation.

For example, suppose I get dealt an KJ of the same suit. Of 169 possible poker hands, that is the 11th best hand you can be dealt, so I'm likely to play it. Nevertheless, with 10 players playing through the river...it still only has an 18.14% chance of winning. Yes, my poker is that precise.

However, along the way you are faced with various decisions. First, suppose I raise three times the big blind which is my standard raise. Someone else goes all in and if you call it risks most of your chips. Well, there are ten hands that are better than KJ suited and that person could easily have one of those.. including AA. Do you call? Your decision has to depend upon your assessment of that other person. During my losing streak, this decision was usually wrong. Most of the time they had a better hand and, of course, nothing happened to improve my hand.

But, of course, perhaps 40% of the time I had the better hand. When that happened, the other person usually got better cards on the flop, turn or river (often the river) and beat me.

Here is a good example, sometimes I'll play in a free tournament in which the winner has a chance to enter another tournament to win a seat at the world series of poker. There are usually 300 people in those tournaments and most of them are crazy. I do my best to avoid playing until the first 150 or so have been eliminated. However, one time I was dealt AA on the first hand. AA is the best hand out of 169 possible hands, but it only has a 33.6% chance of winning with 10 players if all of them stay until the end. I was the first to bet and I raised 3 times the big blind. The next person went all in. Six other players called the all in. What would you do with your AA under those conditions? It's absolutely the best hand, but if I call it means that my tournament life is at stake and with 8 people I only have a 41.58% chance of winning (not even 50-50). Yes, my result is huge if I win.

Okay, so I called. Of the other people who went all in, one had a KT unsuited (the 40th best hand) and another had 33 (the 53rd best hand). The other five all had worse hands. And one person had a 74 offsuit. By the time the river was turned over, a 6 5 and an 8 had turned over to give the 74 offsuit a straight. And I lost with my AA. But that's the luck factor in poker. But what do you do? Fold the best hand and give up 10% of you chips or take a 41% chance that you'll win a ton of chips?

Based upon expectancy, you take the chance -- just as you do in trading. But quite often (59%) of the time, you'll lose everything and be eliminated from the tournament.

And quite often you'll have huge streaks where that happens.

You go in the your KJ suited, raising times the big blind. A king comes up on the flop. You now have top pair with a good kicker. You bet the pot and then someone goes all in. Does that mean they have AA, a set, two pair, or are the bluffing with a draw or with nothing? I'll probably call the all in with high pair and a J kicker, but when your luck is bad, chances are 1) they have a better hand, which might include just a higher kicker or 2) they are bluffing with a draw and they get the draw; or 3) they are bluffing with nothing and they still get something with the next two cards. Those things can go against you many times and you must be able to survive that.

And let's say you don't want to take the chance, after the flop you have the high pair and bet the flop, but you fold later when someone else bets everything. Well, you can only afford to fold like that a few times before you are out of chips. When are a on a losing streak, you'd be surprised how often that happens as well.

But that's why position sizing is so important. You must be able to survive long losing streaks so that you can benefit from the expectancy over the short term.

Posted by Van K Tharp at 06:05 PM | Permalink | Comments (0) | TrackBacks (0)

I like to play the small tournaments. In fact, the site I play at has bonuses if you are one of the better players in the small tournaments. Well, the first day of this month, I played in four of these tournaments. I won 2 of them and placed second in one and third in the other. So then I was curious to see how I ranked. I just spend five hours and did very well, so I thought I should rank in the top ten. To my surpise, I didn't even rank in the top 250.

On about the 18th of the month, I noticed that the leader in that category had about 16,000 pts. When you win one of those little tournaments, you get 18 pts and second gets 14 pts., so I could work backward and see how much he'd played. I determined that it took 1.25 hrs to finished either first or second on the average. This means he had to placed 1st or second in 1000 tournaments (and 1250 hours) to get that many points. I figured out that if he slept four hours each night I and played three tournaments at a time (coming in first or second in all of them), then he could have gotten that many points. My edge is really figuring out the players and using logic and expectancy. And even then I only come in first or 2nd or about 1/3 of them. If I played in three at a time, all I could do is play expectancy and not have any particular edge.

Anyway, I thought something SMELLED and I wrote the site about it. The answer back was even more shocking. They said that some people play as many as 12 simultaneous tournaments. So if he played 16 hrs a day in 12 tournaments and won more than half of them, he could get that many points. But I can't even imagine playing that much. You are basically be making a decision every few seconds. But apparently that is what some people do. And I personally think it is insane.

And if people do insane things in poker, it really would amaze me to see what they do in the markets.

Posted by Van K Tharp at 12:02 AM | Permalink | Comments (2) | TrackBacks (0)

Dan Harrington, one of the greatest poker players ever, said that, "Over the long run my results will be roughly equivalent to the sum of my opponents mistakes less my own mistakes." But as I have said regularly in the psychological posts, most people don't recongize their mistakes.

Let me give you an example from poker. In a low-stakes no limit game, I called a bet of 3.5 times the big blind with a KT unsuited and there were four people in the pot. My KTu is about the 45th best hand in poker so I could have easily been outclassed by one of the other hands. However, the flop was very favorable K42 with two spades. I check and someone with a small stack went all in (which was about twice the size of the pot). One other player called and I called.

On the turn an Ace came up. The next player raised enough to put me all in. I thought for as long as I could. I was beaten at this point with A anything and only a ten out there could save me. I was also beaten by an KJ and a KQ. And there was always the possibility of a flush. One of these two probably had me beaten and I assumed it was the one who just went all in. At this point I really assumed that calling was foolish and I folded. I lost most of my winnings by that fold, but I was still ahead in the game.

The last card came up as an insignifcant 6 of diamonds, so there was no flush for anyone with two spades in their hand. But I was shocked when the other players cards were revealed. The first one to go all in had a nut flush draw. He would have beaten me on the initial all in with his pair of aces. However, the other person who went all in second and would have put me all in revealed a 74 of spades. He had called the intial pot with trivial cards and my fold had cost me a lot.

I think my original fold still made sense, but it was a mistake had I known this player a little better. Over the course of 90 minutes, this player had lost three times the maximum buy in. Knowing that I should have taken a chance, but I didn't. It was clearly a mistake.

Ironically, I've found in cash poker games that you only get to see other peoples whole cards in one hand out of five or six (sometimes even more). That means that most of the time, people fold to big bets. There are a lot of opportunities for bluffs.

Posted by Van K Tharp at 04:24 AM | Permalink | Comments (1) | TrackBacks (0)

I play a lot of poker tournaments now and I usually finish in the money or close to it. However, I've noticed that I still occasionally make a big mistake. What's a big mistake? Well, suppose I raise to 4 times big blind before the flop. I have King Ten suited. That is the 14th best starting hand of the 169 possible hands when playing with 9 other people.

Now what happened today was someone quadrupled my raise. My immediate response should have been to think, "this is getting really big. What are the chances that this guy has me beat? He could easily have a large pair a very high suited connector (AK suited). I have the 14th best hand but if he has, let's say, a pair of queens, he's got me beat." I didn't do that, I just called, "thinking he's probably bluffing or something similar." Sinice I had the 14th best starting hand, it was probably reasonable to call or it might have been a minor mistakes. He did have a pair of queens, but I didn' tknow that.

The flop comes (the first three common cards that are dealt face up) and I don't improve my hand. I bet half my chips to get his attention which was my second mistake and my first BIG mistake. My hand was not improved at all...I probably shouldn't have called the initial raise, and I certainly should not have bet when the flop didn't improve my hand. I bet simply because I was feeling "powerful." I wanted to bully him. And those feeling produced a huge mistake. But at least I'm aware of the feelings that come up and can work on them constantly.

My opponent then goes all in, and as if I wasn't stupid enough so far, I called his bet. Why? I have nothing. Most of my chips are gone if I lose and I bet them without even having a pair. My thinking was, "I'm pot committed now, perhaps I'll get something with the last two cards." Big, big mistakes. But at the time, I didn't think any of these things -- I just reacted. I had about 30,000 chips when this started and let's say my initial bet of 2000 and the raise to 8000 were okay. At that point, I still had 22,000 chips and enough to compete in the tournament. But the next bet cost me $10,000 more and the all in reraise cost another $10,000. Those two mistakes cost me 2/3rd of my chip stack (equity) and were disastrous. They were emotional mistakes.

And, of course, my opponent, as I said, had the third best starting hand in texas holdem, a pair of queens. There were only three cards in the deck (the other three kinds) that would allow me to beat him. But no kind came up in the last two common cards and after those mistakes, I'm practically out of the tourament.

At the time, I made those mistakes, I was 4th in chips among the final 9 of 90 players. A first place win in the tournament was huge compared to a ninth place finish. Ninth place paid about twice the entry entry-- which wasn't much payoff for three hours of poker. But when I finished the three mistakes in that hand, I was 9th in chips. And I was eliminated from the tournament shortly thereafter in 9th place.

I'd played about 200 hands mistake free and then I make a bone head play and basically miss out on a big payoff.
Mistakes in poker, just like mistakes in trading, can kill you.

Now you might ask why did I made the mistakes. The answer is simple -- emotions. That whole series of mistakes occurred in the space of about 5 to 10 seconds. Not much time to think. I was simply ruled by my emotions.

I've been working on eliminating mistakes and I'm doing pretty well. I usually finish in the top 10% in most tournaments I enter now. I used to make a lot more mistakes, and when I did, I didn't make any money. But today's mistakes probably prevented me from making two to ten times as much money as I should have, so its still very expensive.

I currently use all the tools in the Peak Performance Course to eliminate mistakes. And I'm getting better and better. I used to make 3-4 mistakes in 200 hands, and now its just 2 major mistakes in one hand. And quite often I don't make any. Perhaps soon, such mistakes will be a thing of the past.

So what's the point and how does this relate to trading? Well, it all relates to your efficiency as a trader. How many mistakes do you make and what does it cost you? Poker is a good way to look at this because 200 hands in a few hours probably is equavalent to 200 trades in terms of the opportunity to make mistakes.

Posted by Van K Tharp at 04:49 AM | Permalink | Comments (3) | TrackBacks (0)

I want to talk about poker again. I played in a $5 tournament with 280 players. I can't even remember cashing in on such a tournament, but I know I can last a long time, and the most I'd lose is $5. The tournament started at 2:30 PM and I was playing until almost 7PM. The reason is that I not only made it to the "make money" level, but I finished second. I finished 8th in a tournament with 115 players once. In that one, I and had a chance to win, but because I was second in chips at the final table. But I ended up going against the chip leader all in on the first hand. I lost on the river and ending up making $195 by finishing 8th. It cost me $20 to make $195. In this tournament, it cost me $5 to make $231. A new record day for me.

But the story is not over. On Saturday, I did the same thing, but the results were a little different. This time I finished first out of 343 players and doubled my payday. Again a new record. Coming in second on Friday made me think I was lucky. Coming in first and second on two consecutive days made me think I was pretty good. However, I then entered some 9 player tournaments in which the top 3 get paid. I could make money in any of those and in the first one I was eliminated first.

A big ego hinders trading and playing poker.

Van

Posted by Van K Tharp at 10:42 PM | Permalink | Comments (3) | TrackBacks (0)

One of the comments to my poker entry mentioned how good an Ace is heads up. Well, we now have the data. on heads up from 10 million simulations. When there are ten players, A2 ranks 101 out of 169 possible hands. However, when there are just two players it ranks as the 46th best hand.

It just shows how important the context is.

Posted by Van K Tharp at 11:40 AM | Permalink | Comments (1) | TrackBacks (0)

I started looking at the top poker hands that I play in terms of how often I play them and how well I do with them. And what I found out startled me. First, I know that hands consisting of an Ace (A) plus another card of a different suit (below a ten) are not nearly as valuable as most people think. But what I found out is that even though I know that, I'm still more likely to play them.

Let's look a two examples. The first one is A9 unsuited. It ranks as the 63rd ranked hand (out of 169 possible holdem hands), but I played it more than any other hand ranked above it. Hmm.

Or how about A7 unsuited? That hand is the 82nd ranked hand.... so near the middle of pack. But I've played it 8 times. In contrast, let's look at another hands that's much stronger, but doesn't stand out -- K7 of the same suit. It's the 42nd ranked hand, but I've never played it. Now it's possible that I've never seen one, but it also much more likely that it didn't stand out and a hand I wanted to play and just threw it away.

So one is much more likely to play hands that stand out and much less likely to play stronger hands that don't stand out. And if that applies to poker, it certainly applies to trading. What happens when a stock is recommended on CNBC. It might be a dog of a stock, but it suddenly stands out, and people are likely to buy it.

Van

Posted by Van K Tharp at 10:55 PM | Permalink | Comments (2) | TrackBacks (0)

I love playing poker and one of the reasons is that I think it's very much like trading. First, you have to assess your initial hand and bet it only if it is above average. Interestingly enough, most beginners play every hand and many people who think they are not beginners still play every hand.

Lets look at an example. I had a computer simulation run of 10 million hands of poker with 10 people playing to determine how likely any starting hand was of winning.

Incidentally, if you are a poker player and would like access to that data. I'm willing to share the cost of the simulation with about 10 people (i.e., about $75 each). If you are serious about poker, its a no brainer because very few people have access to this sort of data. If found a listing that claimed to be such a simulation in a book, but there was NOTHING accurate about their data. I think it was actaully plucked from air. Oh, contact me at our web site (info@iitm.com) if you have interest in the data.

There are basically 169 different starting hands and I now have them ranked in order and I bet that's information that a whole lot of people don't have. Those hands include 13 pairs. The suited combinations such as AJ suited. And the unsuited combinations. The best hand, of course, is AA. But how many times do you think AA will win against 9 other players if nobody folds and all the cards are dealt. The book I read said 86% of the time, but it was way off -- way off.

Most novices like to play Ace plus anything. But if you are talking about unsuited combinations, then only the combinations AKu, AQu, AJu, and A10u fall within the first 50 hands. And only A8u and A9u fall within the next 25 hands. And if you are talking about something like A2 unsuited -- it doesn't even rank in the top 100 hands (out of 169). Yet people play it all the time. It sort of like what happens when some analyst makes a recommendation on televion, most people want to buy that stock even though its probably a dog. Well A2 unsuited is definitely a dog of a poker hand.

Van

Posted by Van K Tharp at 05:59 AM | Permalink | Comments (1) | TrackBacks (0)