Poker, Trading and Making Adjustments

In my Thursday report to members, I talk about the current market, making adjustments and poker:

Before we begin, let me compare what's going on now to poker. In Texas Hold'em, the best hand pre-flop is pocket Aces. Most players try to get as much money into the pot as they can when they are dealt this hand. While this is a great hand before the flop (the three community cards that are dealt to everybody), a flop that leaves open the possibility for a flush, straight or trips (hands that beat pocket aces) can spell disaster. Great players can lay down pocket aces or control the betting in order to limit risk. Amatuers can't adjust and end up losing their bankroll. The ability to adjust the game plan as more information presents itself is what seperates the men from the boys.

With the poker analogy in mind, let's analyze what's going on with the market. Originally I planned to start shorting as low as $87.50. At his level I expected stochastics to reach 90, which would give an extremely overbought reading. However, we've had enough consolidation to drop stochastics enough that the $87 price level will probably only give us a mild overbought reading. Thus, it's time to adjust.

I am raising my short entry level to $89-91. If stochastics are still not near 90, I'll raise the price entry to $93-95. These price level correspond with the resistance lines on the chart below.

I am not looking to enter at these levels. Basically, we are at a level that is too overbought to enter, yet not overbought enough to enter short.

SFK Trade, Partial Exits and Poker

I received a number of similar questions about the SKF and Poker posts:

How did you determine your partial profit target for the SKF trade; and when do you decide to use a full exit versus partial exits?

I like to use partial exits when major resistance is more than 10 percent from my entry. This happens quite often with certain setups, like oversold bounce and breakouts-pullbacks.

For the SKF trade, major resistance is near the 50 day moving average at about $123. That's my target. However, that's about 20 percent away from my entry. If my targer never got hit, I would not want to give up a 10-15 percent gain. To remedy this problem I use a partial exit at around 10 percent, move up my stop to lock in that profit, and hold on until my next target is hit.

It seems that you were upset with yourself about the "big hand" in the poker post, but you said you had a 95 percent probability of winning. Why is this a bad move?

I confused some of you about what I was upset about with regards to my play that night. It wasn't the intitial $3600 bet I lost. I'll take a 95 percent probability every time. What I was upset with myself about was the $900 I lost after that hand. I made poor decisions because I was an emotional wreck, or on "tilt", because of losing based on a good decision ealier. So I wasn't criticizing my play on the big loss, it was the smaller losses after that hand that I need to work on.

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.

OT: Poker and the $5915 Hand

Today I won the second biggest pot in my relatively short poker playing career--$5915.

Some of you may think I was crazy to call all-in with a two pair, but my bank roll could easily cover the loss and I had my opponent on a flush draw (he had made this exact same move an hour earlier and I had never seen him not raise big pre-flop when holding any type of pair), thus no worries of a set.

So basically, I had 65 percent odds that he would not make a flush. Now the move looks a lot better, and over time I'll make money on this type of play.