Picking good stocks is only the first step to become a consistently profitable trader. Those of you that track the performances of stock picks I post on http://www.cisiova.com/analysis.asp know that it is impossible to determine if a stock is good without a good exiting strategy. And for most traders, exit strategy is the hardest part. Many people say that to trade profitably you need to develop the right mentality. Unfortunately, such winning mentality can only be developed through experience. However, there is a short cut to get through the learning curve without throwing thousands of dollars in the process. This short cut is playing POKER.
Yes you heard me right. Apparently, playing poker has a lot of similarities with investing in stocks. First of all, they both deal with money, uncertainties, and a keen judgment of potential risk and reward. In this article I will explain the similarities and differences between stock trading and poker. But before proceeding, make sure you know the rules of Texas Holdem and fluent with the terminologies.
Think of stock picking as looking for good hands to play. In Texas Holdem, you can look at the two hole cards and decide whether you can play the hand or not. Similarly, you can analyze the stock before entering a position. Fortunately for you traders, no one will raise pre-flop, so you just pay the commission. Remember to exit the position you also need to pay the commission, which implies that the cost of entering a position is two times the commission. Good poker players only play good hands, so you should do thorough researches before entering a position. One good thing about trading is that you do not have to wait for good stocks like poker players wait for good hands, you can find good stocks on stock picking websites or using screeners to find them yourself.
Once you call the blinds in poker, you get to see the flops and two more cards. Think of these cards as the performance of your stock after you enter the position. In poker, the flop can make a good hand, a medium hand, or a bad hand (by helping your opponents). In trading, you can observe the potential of the stock as well, and you should objectively judge the downside and upside potential of the stock. In poker, there are times that you have a good hand, and your opponent have a better hand, and you know you are beat. These are the times where your mentality matters the most. An experienced poker player will fold his hand regardless of the amount of money he has put into the pot. As a trader, at times that you think the upside potential fails to actualize, you should sell the stock regardless of how much you have lost. On the other hand, when a good poker player knows he has the winning hand, despite the possibility of losing at the river, he would bet aggressively, without fearing the small losing possibility. In trading, this translates to if the stock goes up and manifests higher upside potential, you should not fear that you will lose your recent winnings. Therefore the winning mentality is to ride when the stock is going up, and sell when the stock is losing its heat. This discipline is easily said than done. So many times I have heard people lost all their money because they hold on to losing positions (due to hope) and sell winning positions too early (due to fear).
By playing poker, you would get the chance to master your emotions, learning not to hope when you are beat, and not to fear when you are favorable to win. You want to lose small and win big, not the opposite.
Now go practice. This mentality only develops with experience.