My Worst Poker Hand and a Trading Lesson

Last night I was sitting at a hold em table with a 10/20 blind and started with $3000. After about an hour, I was up to about $3600, without having played any big hands. Then I got the hand we all wait for, pocket aces in good position. The guy before me raised the pot to $70, I re-raised to $330 and he called.

There's close to $700 in the pot. The flop comes down 2, 3, 6 rainbow and my opponent puts in a $700 bet. I know from playing with this guy before that he's willing to make big bets with nothing more than top pair, so I raise him up to $1400. He not only calls, but puts me all-in. There's over $7000 in the pot. I call and he's got an A-6. The only way I lose is if another 6 comes down. Thus, I had about a 95 percent chance of winning a huge pot.

Unfortunately, he hit a 6 on the river. I lost my $3600. I pride myself on being "zen" and taking emotion out of things like poker and trading. I trade and play poker based on probabilities and risk, but I couldn't control my emotions here. I was pissed. I told the guy that it sucks that a bad player gets paid off for playing stupid (I wish I could take those comments back).

I should have taken my loss and went home. Instead, I put down another $3000 and played for another 2 hours. By the end of the night, I had lost another $900 making bad plays. I was what is referred to in the poker world as "playing on tilt", making bad decisions because I was pissed.

Can you see how this related to trading? Have you ever taken a loss off a great setup, only to get upset and then start making bad trades? If you have, take heed from this poker lesson: never play when you are emotionally off balance because of a losing hand.

Questions and Answers

What books do you recommend?

I have read over 100 books on trading and frankly, most have been a waste of time. A few that I have liked include The Market Wizards books by Jack Schwager, Entries and Exits by Alexander Elder, Thomas Bulkowski's chart pattern books, Alan Farley's trading setup book (if you can get through the horrendous writing style) and Technical Analysis for Dummies by Barbara Rockefeller.

I would spend more time going through historical charts than reading books. Flip through at least 100 charts every day. Look at past winners. Understand price movement, momentum, sector analysis, volume and patterns.

You don't talk as much as you used to about psychology. Do you focus less on it?

Not at all. These days I focus more on psychology than I do the markets and setups. At this point, trading analysis comes easily to me. It takes me about 10 minutes a day to analyze the indexes and key sector charts to come up with a theme for the next day. The hard part for me, considering I have a ultra-competitive, addictive personality and am prone to taking gambles, has always been the pyschological aspect.

Creating a simple, balanced lifestyle and adopting a Zen-like approach to trading has helped. I also focus more on research than obsessing over current positions. I force myself to let my initial trade analysis do the job, and only exit at my preset stop or target.

Earlier in the year you metioned you wanted to start trading options. Have you put on any trades?

Not yet. I have done some reading and am starting to get a feel for the vehicle. I hope to put on my first options trade sometime this year. I know a few of the trades I have made would have made much more money had I went with an option strategy.

Are you still as bearish on gold as you were before?

I am standing aside the gold trade right now. Remember my analysis was short term (and profitable), when I made my trade. Now we are getting mixed signals. Price action still looks bearish, but I am seeing some indicator divergences in GLD. For instance, RSI broke out recently. Gold stocks like BVN and GOLD are acting more bearish than GLD. These might be better trades, although they are currently very oversold.



What sectors are the best right now?

It's tough to say what's "best", since strong sectors like energy might not currently be good long trades. I'll just list areas that I am watching closely, both for long and short setups:

Energy, Coal, Financials, Steel, Natural Gas, momentum tech stocks, recent earnings breakouts and breakdowns, Railroads.

A Zen Master on Genuine Insight

Followers of the Way, do not be deceived by teachers who everywhere say “I know Zen, I understand the Way,” and who endlessly deliver discussions like mountain torrents. All this is action that produces hellish Karma. If one is a true learner of the Way, one does not search for the faults of the world, but rather speedily applies oneself to attain genuine insight. If one only can see with perfect clarity, then all is completed.

- Rinzai (d. 866)

Losing My Flow and Today's Trades

I panicked. As I watched QID gap down this morning, I could feel myself losing my flow. All the Zen stuff I write about went out the window. As my highly developed flight reflex kicked in, Mister Self Awareness (that's me) was thinking like a four year old being chased by the boogie man. In the time it would take Bruce Lee to unleash a lightning quick combination of punches and kicks, I had pulled up my trading screen and was ready to click on the "sell" tab.

Then, for some reason, a moment of clarity came over me and I remembered something I had blogged about last month. Before placing a trade, I like to ask myself what an expert or someone I respect would think if he or she was watching me. I then imagined what you would think of me right now. I heard a voice say, "this guy's trading like a coward. I can't believe I read this damn fool." Feeling royally embarrassed, I took a step back and decided to wait for the expected bounce that I like to preach about. Of course, the bounce came, and I was able to unload my position for a small gain, in the process saving myself money and embarrassment. Thanks guys.

I sold 1000 shares of QID at $56.69 (entry at $56.50) for a $190 gain (+.33 gain).

I sold 300 shares of VLO at $57.22 (entry at $55.60) for a $486 gain (+2.9%).

I currently am 100% cash, although that could change soon. I may by QID on weakness.

Zen, Pullbacks and Boom

It is as though you have an eye
That sees all forms
But does not see itself.
This is how your mind is.
Its light penetrates everywhere
And engulfs everything,
So why does it not know itself?

--Foyan (www.dailyzen.com)

More in this quote tonight, along with my trades and tomorrow's watchlist.

Note to those who read my watchlist this morning. The free fall in BOOM today does not constitute a buyable pullback to support. Pullbacks on high volume or off long price bars are to be treated as kryptonite, and should be avoided at all costs.