Poker Tips Applicable To Trading From Pro Player Annie Duke

The following is a guest post from EarningsBreakout.com:

"I find that Annie Duke’s tips on poker are directly applicable to trading.

Skills needed to be a good poker player (trader)
-grasp of math, probability, and game theory
-have to have “a lot of heart.” The ability to understand not only what the right play is, but to follow through with it (when you have a good trading setup, GO FOR IT)
-what separates the good from the great, is that the good know the right answer, but they don’t follow through with it
-it’s not about winning right now, but making the right decision to win in the long-run (process over specific outcome)
-be a very good reader of people and bet pattern analyzer (read what the market is discounting)

What makes a successful poker player
-someone who manages their money really well (use rational position sizes and cut losses)
-bankroll requirement for certain game (asset size), how much you can risk in a certain game (position size)
-someone who has a lot of control over the emotional aspect of the game
-poker players lose a lot because there is variance to the game. Being able to emotional handle the losses and to not allow those to affect your play going forward is KEY (don’t get emotional over losses and then try to gamble/over-trade your way back to break-even)
-there are lots of players out there who have more talent in their pinky than my whole entire body, but they’re broke and I’m not
-you work with the skills that you have and recognize the games you should be playing in (what stocks and sectors do you know? what’s your circle of competence)
-don’t play in games where other players are better than you, which is ego-driven (trading sectors and stocks you don’t know)
-manage your money well and manage your emotions well will make you successful

-no-one wants to hear you moan. what productive thing is coming out of moaning? do something constructive. analyze your hand (trade), should I have been involved in first place? don’t focus on the one piece of bad variance (bad luck)
-don’t get emotionally invested on anything at the table (be rational in trading decisions)
-you take what the opponent has done in the past hands. are they conservative? are they wild? how have they bet good/bad hands? how did they behave? constantly update that based on what they do (look for patterns in the market after news)
-come up with best strategy to efficiently and precisely take someone’s chips. she is always willing to flirt with someone on the table (just win baby. making money is the only goal)

Annie Duke Big Think Videos

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Thanks to EarningsBreakout.com for the great post as there are definitely a ton of parallels between poker and financial markets and you can often apply methodologies to either. And, as we've covered before on the blog, hedge fund manager David Einhorn of Greenlight Capital is a poker player and has competed in the World Series of Poker.

Trading Setups Watchlist

It's been awhile since we last posted up the OptionAddict's technical analysis videos where he lists off some trade setups for the present week but we're back with his latest video.

Here are some of the charts and patterns he is eyeing for some near-term moves and they always make good watchlists. Video below, RSS & Email readers come to the blog to view:

Technical Analysis Weekly Watchlist: Trading Setup Charts

The OptionAddict is back with his latest weekly watchlist of trading setups found via some good 'ol technical analysis. The video is embedded below where he swings through some charts and patterns. RSS & Email readers come to the blog to watch the video. Enjoy:

Bill Luby's Rules of Trading

Over the past weekend, we read a great list of trading rules. The piece was by Bill Luby, the author of the VIX and More blog you'll find on our blogroll. We've been longtime readers of his blog and wanted to highlight it to MarketFolly readers who may not be aware.

Here's his list:

"As requested, here are ten overriding principles that have survived the past five years, through bull and bear markets:

1. Always live to fight another day
2. Entries must have a statistical edge
3. Patience and discipline
4. Be a jellyfish (swim with the current)
5. Trade only liquid securities
6. Focus on trying to capture the middle 80% of a move
7. Know your exit points when you open a position (and stick to them!)
8. When in doubt, reduce position size by 50%
9. Limit losses to 2% of total equity for any single trade
10. Start each day with a clean financial and emotional slate

The above list is relatively generic, but it helped provide me with a framework for organizing how I would approach trading as a business, what strategies I should adopt, how those strategies should be executed, and ultimately defining what success should look like.

Trading rules are vitally important - as is knowing when they should be broken. Even more important, I believe, is the process that one goes through in order to arrive at these rules and to make sure that as new market situations unfold and new blind spots are revealed, the rules and guidelines are enhanced to maximize the opportunity for the trader to continue to grow and develop."

Great stuff from Bill which I'm sure many of you all can implement into your own regimen. Make sure to check out his blog. And also, if you want another great set of trading rules, make sure to check out noted trader Dennis Gartman's Rules of Trading as well.

Dennis Gartman: Long Cheap Retail, Short Malls

Dennis Gartman says he has survived this mess because he is a hedger. He is long something, and short something against it; or vice versa. And, we track him on the blog for this exact reason. We run our portfolio in a similar manner and believe that if you're going to try to run a hedge fund-esque portfolio, you truly need to be hedged. So many funds these days have employed leverage and have ran such concentrated portfolios with 'all-in' bets that they have deviated from the original defintion of a hedge fund. We hope to highlight what a hedge fund should be in the true sense of the world. We like to keep it old school.

Noted trader and author of the Gartman Letter, Dennis Gartman, recently sat down and basically said that he likes being long Canada and short the US. Gartman likes Canada's commodity exposure and so he is bullish on Canadian equities, relative to the US, as well as the Canadian dollar compared to the US dollar. If you're unfamiliar with Gartman, check out his Rules of Trading to get a better idea of how he thinks and positions himself.

In terms of specific equities, Gartman likes Family Dollar Stores (FDO) in that they are the cheapest of the cheap. From the beginning of this recession, we here at Market Folly have preached that you want to be long the cheap goods and short the expensive. We've been long Walmart (WMT) and McDonald's (MCD) and short the retail indexes, some discretionary retailers, and commercial real estate plays that focus on malls and retail such as Simon Property Group (SPG). Gartman harps on this point and claims that FDO is the lowest of the low in terms of cheap retail and says he likes to be long the cheap plays. Additionally, he has joined us on our 'short the malls' play and is short SPG as well, as mall traffic and consumer spending continue to decline.

He also mentioned to keep an eye on the Yen/Euro Cross in forex markets. This pairing began to rollover as the crisis began and he has postulated that the recent turning in this cross could possibly be bullish for markets. He cautioned to monitor it carefully, as it could just as well rollover yet again and signal another leg down.

In terms of Canadian equities, Gartman specifically likes Canadian banks. He is long the Royal Bank of Canada (RY) because of the technicals. He stated that there is no way he can go in there and examine every little detail of their balance sheets. That's the big mystery of financials; their balance sheets are like an abyss. He's simply gauging the price action and has noted that the chart has shown some signs of improvement. He also mentioned that he was looking at CIBC and BMO. Plus, he's bearish on US banks, so that sets up nicely.

He has liked being long infrastructure and short the general markets. But, that position started to move against him and he has now shifted into a long Copper position. He sees this as an alternative infrastructure play for the mean time and would like to move back into his infrastructure play.

We've covered Gartman numerous times on the blog before, as he recently said he saw Gold becoming the world's second reserve currency. He has also mentioned to keep an eye on the Baltic Dry Index and Transports, as they are leading indicators of global economic activity.

Dennis Gartman's Rules of Trading

I've seen these rules numerous times but have never posted them up. So, I have to give a hat tip to Todd Sullivan over at Value Plays for posting them up recently and reminding me of them again. If you are unfamiliar with Dennis Gartman, he writes the famed Gartman Letter. Taken from his site, "The Gartman Letter is a daily commentary on the global capital markets subscribed to by leading banks, broking firms, hedge funds, mutual funds, energy and grain trading companies around the world." He also talks about his trades/plays and walks you through his thought-process. We definitely enjoy his commentary and if anyone is a subscriber, let us know. To the rules:

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING


1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.

6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!

11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”

12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.

13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.

14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.

15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.

16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.

Recommended Investing Books: Fundamental Analysis & Valuation

We've been getting some requests from readers for some good books to read when it comes to investing. So we're posting up a list of recommendations for learning fundamental analysis and valuation. Without further ado:


The Intelligent Investor by Benjamin Graham. If you had to own one book about fundamental investing, this would most likely be it. Benjamin Graham was a legendary investor who helped pioneer the ways of value investing and taught Warren Buffett a lot of what he knows today.  It is definitely number one on the list. If you haven't read it, pick it up immediately.

Security Analysis by Benjamin Graham. This is the second of Graham's must-read books. The book features the value investing philosophies of Graham and Dodd and a foreword by Warren Buffett. If you're lacking in understanding how to perform fundamental analysis, then this is the book for you. After you've finished reading, you'll be able to tackle balance sheets like none other.  It's a must-read for anyone interested in the fundamental analysis related to investing.

Margin of Safety by Seth Klarman.  Written by one of the greatest investors of all time, this book is nearly impossible to find a physical copy of since it's no longer being produced.  Click the link above to see if there's one available.

You Can Be A Stock Market Genius by Joel Greenblatt.  The title is cheesy, but the book's contents are not.  It will teach you catalyst-based investing techniques that exploit market inefficiencies such as risk arbitrage, spin-offs, etc.

The Art of Short Selling by Kathryn Staley.  While the above books teach you how to invest (go long), this book teaches you how to hedge/go short, an important tactic used by most hedge funds.



That concludes the fundamentals list.  For you traders out there, we've also posted up a recommended reading list for technical analysis and charts as well.