Hey Genius Nation. Do you guys remember a few years ago when there was this huge boom in popularity for poker? Especially Texas hold ‘em poker? I’m talking about like I think it was 2005, six, 2007, eight, that time-frame? Everywhere you went all you heard was Texas hold ‘em, Texas hold ‘em, and then they had the World Series of poker. That was actually on TV, and they had so many different channels were it was just poker, poker all the time. Part of that was because it was so easy to sign up and play poker online, and they had all these different websites where you could go and deposit your money, and play against thousands and thousands of people. That was a dream back then. Everybody, it didn’t matter how old you are, didn’t matter if you had any skills, or it didn’t matter what you did for a living, you could go online behind your computer screen and just play poker.
If you won, you won, if you lost, you lost. It was the ultimate dream for so many people, especially the young kids. There were a lot of kids who made a lot, a lot of money. Millions of dollars playing online poker. Unfortunately, that came to a halt pretty quickly when the US government decided to crack down on all the poker websites. Now if you’re in the states, unless you go to a casino, or you go to a bar, it’s really hard to find poker. Especially online. I’m sure you could find if you want to, but online it’s really hard unless you know your way around the system, and the technology and all that so that they can’t tell that you’re in the United States. Because it was always against the law, but for a while they didn’t enforce it, and it just got really, really big.
I was caught up in it just as much as everybody else. I had all the books, I was watching all the shows, I was watching the pros to try to figure out what they were doing and try to learn from them. I was playing online every night. I had dreams of being the next big poker superstar myself, winning millions of dollars while sitting in my underwear at home. Sounds really cool. Daniel Negreanu is the guy who was my favorite. His name, his nickname is kid poker, because he still looks like a young guy, even though he’s, he’s a couple years older than I am, so he’s in his 40s right now. The way he would play would be completely amazing. He could tell what everybody on the table had. What cards that they had. Because normally in Texas hold ‘em what happens is everybody’s given to cards, and then those cards nobody else can see.
Then there are three cards, and four cards, and five cards that are dealt face up that everybody can use. The trick is to try to figure out what everybody has as their hold cards, meaning as those to cards that they got originally. This guy was uncanny accuracy, could tell and pick what people had. He’s like, “Well yeah, you have an ace, and you have this.” It was amazing how often he was right. Most people consider poker a form of gambling. If you ask anybody off the street, hey, poker, that’s gambling, yeah, that’s just gambling.
There was actually a study done that showed that playing poker well is actually a skill. It’s not just up to chance. That was their main argument of why poker should be legal, and why all these websites should be shut down, because the websites themselves are making millions and billions of dollars themselves. They are making a ton of money off of this. That was the argument that playing poker is not like blackjack, or video poker, not video poker, like the slots. That’s just up to chance. To be good at poker, you actually have to have skill. The government didn’t see it that way, so poker is still illegal. Many of the same skills that you need to play good poker are the same that you need to trade well.
That was another thing that I realized later on that a lot of people who are really, really good traders were good poker players at the same time, because they had the same types of skills. Currently, the best poker player in the world is a guy named Phil Hellmuth. Or Hellmuth, I don’t know how his name is pronounced. Phil, and he’s also known as the poker brat. In fact, he’s got a book out called the poker brat. Now, I don’t know if he is the best in the world. I think he’s probably the best because he has the most rewards, and accolades, and what they call bracelets, and tournament wins, so I’m just going to say that he’s the best. I don’t really care. For the sake of this podcast I’m going to call him the best. Please don’t write in, and email me, and call me and tell me, “Hey, this guy’s not all that, he sucks.”
I don’t really care, but what we are going to be talking about is what I learned from this guy. Recently I just heard a interview with him where he’s being interviewed by somebody else, and there were a couple things that really stood out to me that can actually be directly applied to trading, and that can make you a better trader just by implementing these things. I wanted to take the time out in this episode to actually go over both of these in a little detail so that you can take away some of the skills that this guy already has that he uses at a world-class level. Now, the first thing that he considers super important is money management. He actually considers money management more important than poker skills.
Because what he was saying, he gave an example that if there is a guy who’s really, really good at money management, but he’s not the best, best poker player, compared to the guy who is the best, best poker player, but doesn’t have any money management, the first guy is going to come out ahead in the long run, the first guys going to have a more stable life, he’s going to have less stress, he’s going to be happier, while the second guy who’s really, really good at poker is just going to be up and down. He’s going to be super rich, and then he’s going to be super broke. I don’t know if you can be super broke, but he’s just going to be broke.
Then he’s going to have people where he’s borrowing money from friends and family trying to get back up there, and he might get up there, but then he’s going to lose it all again, while the guy with the money management is going to be more study, and more even, and is just going to be better overall. It was such an interesting concept. Something that we don’t talk about much in trading. When you are under stress to produce, when you have a trade that just has to, has to work out for you can’t pay the mortgage this month, you’re going to screw it up. There’s no if’s, and’s, or buts. That is just the way it works.
A lot of the times when you’re behind the eight ball, and if you’re putting on a trade that just has to, has to work, something is going to happen, something comes out of left field, and is just going to block you, and the trade is not going to work out. Now, you might say that you trade better under pressure. I’ve heard that a lot. Yo, man, when I have to do it, when I have to pull all the chips out, when I have to get it all done, my back is to the wall, I trade better. I’ve heard that many times. I say bull. I don’t believe it. This goes back to the episode I did, the podcast episode called the five finger strategy. If you haven’t heard that one, go find it, and download it, and listen to it, because you need to.
Trading, for a living, sounds great and full of excitement. You are going to trade better when you don’t have the pressure on you to just have to win. The pressure that every trade has to produce. This is one of the reasons that people with a little bit of money when they get started don’t win. Because people ask me all the time, Alan, how much do I need to get started in selling options? How much money should I have? Can I get by with a couple hundred bucks? Can I get by with thousand dollars, or $2000? What’s the magic number? What do I need? We recommended, for years, people saying, “Hey, you know what? We recommend that you start with $10,000.
If you have to, like if you have to twist my arm and say, “No, I don’t have 10. What’s the least, least, least I can get by with?” I would probably say 5000. Because if you’re starting with 5000, if you’re starting with less than 10, it’s really, really hard to get enough wins while you’re learning that you overcome the commissions, and you overcome the losses so that you can keep making that account grow. Because one loss knocks you down so much. You lose so much of your account. Such a large percentage that it’s really, really hard to recover. I think that’s what Phil is saying here as well. Part of Phil’s money management is that he places a limit on how much he can lose in one day. He calls them basically, they’re sessions. Every day for him is a session, and so every day he has a limit, and this is it. His limit is $10,000. Which is probably a lot more than what either one of us would want to lose in a day, but that’s him.
We can use the example for that for $10,000. If he loses the limit, that’s it. He can’t play anymore until the next day. He has to wait 24 hours or whatever, the timeframe the next day. Here Phil said something really interesting. He said that on days like that when he hits his limit, most of the time you cannot tell if he’s playing bad poker, or if he’s just getting unlucky. That’s the two ways, why are you losing? Well, the cards just didn’t fall for me, or was that I screwing up? When he loses that limit, he knows that he’s off. He can’t tell why. There’s something there that has knocked him off his game, but he can’t tell what it is, and so he has to step back and take a break. Either way, he needs to get away. If he’s not playing well, he should get away, or if he’s being unlucky, you need to get away. He would go see a movie, he would go take a nap, call a friend, whatever.
Then once he calms down, he can reconstruct in his mind what happened and try to figure out. Try to figure out what went wrong. Because he’s out of the situation, so he’s a little bit removed from it. He can go back and think about it, and say, okay, this happened, and this happened, and well, maybe I should have done this, maybe I should have done that. Then he can make adjustments to his game. We need to do the same. Once you get on a losing streak, and these happen to everybody, so if you get on one, don’t feel bad about it, don’t feel that you’re stupid, or you’re a bad trader, or whatever if the strategy doesn’t work. Before you throw in the towel and you do it, you go that way, I want you to take a step back.
Before you’re too far into the forest and you can’t tell if you’re trading badly, or if the market is changing, or if the strategy is just wrong, there could be any number of things. If you lose over and over again, take a step back, go back to the basics and truly figure out what is it that went wrong. Is it you? Maybe you’re not right? Maybe you’re not feeling well? Is it the strategy? Again, if there are other people out there that are doing well with the same strategy, then it’s probably not the strategy. Or is it the market that’s changing? You thought it was going to do one thing, but it’s doing another, or it was doing one thing, and now it’s changing, and now it’s acting differently? You have to be able to figure that out as well. You have to have a living. Maybe not 10 grand a day like Phil, but some amount that if you lose it, it doesn’t really impact you that much, but if you do lose it you stop trading for your session, whatever it is.
It may be your session is for a week, or a month, or whatever your timeframe is. Now, for me, most of my trades use monthly options. I record my progress on a month-to-month basis. I don’t do it on a week to week or a day to day basis, I go month to month. Hey, January, how did I do? What did I do? How many trades did I do? What was my percentage up and down? What was my profit and loss? February, how did I do? March, how did I do? That’s how I keep track. For me, a session would be a month. If I hit my limit for that month, well then that’s it. I’m out for the rest of the month.
I don’t do any more trades. I would be on the sideline trying to get my head back in the game. Most likely that is going to save me a ton of money. Now, day traders do this as well. It’s one of the common rules that day traders have that if you lose a certain amount in a day, boom, that’s it, you’re done, you can’t do anymore. That’s how the professionals work, so the big firms in Chicago, and New York, and Boston, and those areas.
When they are employing traders, if you hit your max laws for the session, that’s it, go home, go figure it out. For newbies, what they do is that if you hit your session loss, then that’s it, you’re done for the day, your monitor is off, and you’re just going to go run around and do errands for everybody else in the office. You’re going to fetch coffee, you’re going to get lunch, you’re going to do all the stuff that people don’t want to do, and get you away from the trading and from the computers.
If you’ve ever had it where you’ve won for months at a time, I get this question a lot with option traders, with option sellers, that I win over, and over, and over again, but then I have this one big loss that wipes me out. Well then, if you’re winning over, and over, and over again, and then all of a sudden all of your trades go bad, if something happens and all of your trades start going bad, getting out is exactly what you need to do. Because your head is not in the game. Especially if you cannot tell what the reason is right away. If you’re thinking about it and you say, “Okay, market is just going up, it’s going up, and up, and up, so I’m just going to be putting on all these bullish positions.”
And then the market turns around and you lose on all of them, well, you got to figure it out. Hey, the market turned around, that’s why I lost. But you should have been able to figure out, in advance, why the market did that. Why the market turned around. Sometimes is not possible, but most of the time the market does give clues. The market will give you clues, but going back to what we were talking about, if you were in that position, take a break. Maybe even take a few days off. If you’re doing like me where your session is a month and you lose, well then take the rest of the month off. Get your head out of the clouds, get out of the forest and see what is going on. Go back and reconstruct what happened.
If you had some kind of back testing software that you should have, put the trade on again, see what you would have done differently after you take a break. Not the same day, not the next day, take a break, get out of it, come back with a fresh set of eyes, don’t go back in, and whatever you do, do not get back in the market until you get a brand-new session, until the session is over. Figure it out, what happened? Did the markets change? Was there more volatility all of a sudden? Was there less volatility and volatility drop? Did it go up? Did the market turn and change directions anyway that you can see coming? Or maybe you had too many trades on at the same time and you just lost focus. You didn’t realize what was going on.
Or was it you? Were you the reason? Did you get distracted? Maybe you had a fight with your wife, or your spouse? Maybe you had too much stuff going on in your personal life? Maybe somebody got sick? Who knows. Maybe you were sick. Whatever the cause, identify it after your break, and come back the next session with a way to protect yourself if the same thing happens again. Try to figure out in advance. Like hey, I’m going through this. A lot of people, divorce is pretty common, sickness, and illness, and accidents happen all the time. If you’re going through something like that that’s a little long term, may be divorce, maybe a child is sick, or maybe a spouse is sick, or maybe you’re sick, don’t try to force it. Don’t force the trades.
Take a step back, take a break, calm down, and then when you’re able to get back in when your mind is back in the game, that’s when you come back to the table. This thing will happen. It happens to all of us. We go through ups and downs, we go through our winning streaks, and we go through our losing streaks. It happens to everybody. A couple months ago while I was trading the oil options, I had a losing month. When I went back to analyze the reason, it wasn’t because of anything oil that. Oil was pretty calm, it was me. I just didn’t do well and I let it get away from me. I had too many other things going on personally, and I blew it. I had to take complete responsibility for that. That’s what I put in my notes.
When I’m recording all my stuff, my trades, and how they worked out, and what went wrong, what went right, I put it in there at that I just let things get away from me. By the time, at that time I didn’t have my head in the game, and by the time I got back in, or my head got back in, the loss was too high to recover from, so I had a losing month. Happens to everybody.
I’m sure you can go through, go back in time and look at it and say, “Oh, wow, that’s happened to me many, many times. Well, that’s exactly how you overcome that. You have that session loss, and when it does happen, when you lose, take a step back, take a break, and go through it. When it happens to you, don’t fret about it, just use it as a learning opportunity. You’ll be fine. Now, you shouldn’t have this happen all the time.
If you’re selling options, maybe one month every couple years would be okay, because with the high probabilities that option sellers work with, you shouldn’t be getting knocked around very often. Now, on a side note, in my trading hacks training that you can get on our website, we cover multiple ways that you can tell when the market is turning and the market is changing. Like I said, the market gives you clues when it’s about to turn around. We go over that in this training hacks training. If you don’t have it, then maybe you should. Or if you don’t have your own indicators that can warn you in advance, even if you don’t use the stuff I use, please figure it out and get some quickly.
Now, the second thing I learned from Phil was his pyramid system. Now, back when he was just starting out, this is a story he said, he was just starting out, young guy, one day he’s in this bar, some dive bar, it’s the middle of the day, he’s already high, he’s been smoking weed, he’s already high, and he’s arguing with people about a $20 pool bet. That’s what his life was. He’s a gambler, a degenerate arguing about 20 bucks.
That was when it dawned on him, and he asked himself, he’s like, “What the heck am I doing? I’m arguing over $20? I’m high in the middle of the day?” He went home and he got some perspective, which is really cool. He wrote down six life goals for himself. The first was to win the World Series of poker, and essentially be one of the best poker players in the world. Then he had other ones. He wanted to meet his wife, he wanted to buy a house, buy a car, have a best-selling book, and there was some other one that I don’t remember.
Then he went a step further. He’s got the goals, and everybody has goals. Making a list of goals is not a big deal. I want to be the best trader in the world, I want to retire, great. You have your goals, but then you have to take it a step further. What he did was he made a pyramid, he drew a pyramid with different levels, and he wrote down all the things that he needed to be the best to get his goals. In order to be the best poker player, he would have to have the physical stamina to be able to sit through days and days of tournaments. The mental endurance of getting lucky, getting unlucky, getting the good cards, getting the bad cards, going through hours of boredom, and then getting really excited. He would have to have the cash flow, the money management. He would have to have the skills to actually play poker. He would have to have the presence where people would know about him and fear him. The reputation that he has. He had to develop that.
He made a list of all these different things and he put them all on the pyramid. He listed everything with the easier things on the bottom, those were the foundation of the pyramid, and then he listed the harder things at the top. He needed to be calmer emotionally, and he needed to exercise. He needed to eat better, cut down on drinking, and drugs, and so on. He went to work on those things right away. He didn’t wait around. He made the thing, he had this epiphany, and he went to work right away. A year later, one year later he had accomplished five of his six lifetime goals. Those were the goals for his whole life. He had already gotten knocked out five of six of them. That’s pretty cool, right?
It happened because he got serious. He worked on all areas of his life, because everything is connected. It wasn’t just, I got to get better at poker. It’s not just I got to get better trading, I got to get better at trading, I got to master this thing. No, you have to work on everything. If your emotional status or your emotional state is not online, you’re going to put on more weight. If you put on more weight, you’re not going to feel good. If you don’t feel good, you’re not going to be able to eat up in the morning. If you don’t get up in the morning, you might miss stuff. You might be distracted, and so your trades are going to suffer. All of this stuff is all connected, so we have to realize that as well.
Then what he had was, he had a second pyramid, because he knew that in poker, all of the money flows up to the top, and that’s what he said. At the bottom of the pyramid are these small gains. After that come the home games. Then there are the small casinos, and in the larger casinos, and then there’s the big money, and the big games, and the tournaments all the way at the top. That’s how he laid it out for poker. In order to get to the top, he had to work on all the skills needed to beat each level and then move higher. In his first pyramid, he worked on himself. It was about eating better, it was about staying calm, it was about being less emotional, getting up early, being in good shape.
On this one, it’s his actual poker skills, kind of like our trading skills. What do we need as a trader? Money management is there, risk management is there, adjustments are there, having the right strategy, creating your own trading plan, back testing, all these things are there. We have the same thing in trading. At the base level, it could be your income. Totally, totally based foundation is what I’m talking about. It could be your income. If you don’t have an income that’s not coming from trading while you’re learning how to trade, if you’re already trading well and you’re already trading for a living, then that’s a different thing. If you’re just learning, trading for income is not going to be your base. Your base is too risky. You need to have more than one method of generating an income.
Maybe you’re working, or maybe you have a business. If that income is stable, then you have a stable foundation on which to build on. If you’re looking to get into trading but your income is not stable, the first thing you need to do is get your income stable and then come into trading. Because it’s not going to work out otherwise. You have to have that foundation before you start. It’s very important so that that foundation, that income can give you the freedom and the time to learn without the pressure. I keep talking about this mental pressure, the mental pressure is what breaks people and makes you mess up, makes you miss things in your trading. If you have the freedom, if you have the time to learn because of that income foundation, then you’ll do much better in the long term. Start with the basics. You got your foundation down, and then you start with maybe a simple strategy. Maybe the simplest one is out there.
If we’re talking about maybe covered calls, maybe that’s the first strategy start with. Or maybe credit spreads. For me, those are two, what I would call, introductory strategies. Because the risk is defined, people are familiar with them, with the covered call you have the stock, people are familiar with it, they get the idea, the credit spread, almost similar, similar concept, but limited risk. You start with the strategies. After that maybe you’d build on top of that, maybe you have your money management, you have your risk management, you have your adjustments.
Then on top of that you have scaling, which is probably the biggest thing. Your scaling, because scaling is, what people consider scaling is what I’m talking about going from, say, a $20,000 account, or a $10,000 account to $100,000 account, or from 100,000 to 250, or 250 to 500, or a million. The skills are the same almost. There’s a few little tweaks you need to adjust where you need to head yourself a little bit more, you need to be more protected on the downside, because you have more to lose. Otherwise, the training skills are the same. You find the trades the same way, you get them in the same way, you adjust them the same way, all that is the same, the only biggest problem or the biggest thing that keeping people back scaling is mental. It’s all in your head.
Going from 10,000 to 100,000, everything could be the same except that extra zero, and that extra zero is in the head. That’s what keeps a lot of people from scaling up. If your mental picture is there, it’s going to take you a while to scale up to get over that mental hurdle of being scared because of it’s so much money of risk at one time. You’re working on that, and that’s at the top of the pyramid. You work on all the basics, you work on the base, you have the foundation, you work on the strategies, you work on the management, then when you get to the top, you can work on the mind, and you work on the scaling. By having these two pyramids, it gave Phil a roadmap. It gave him a list of what he needed to be working on right then and there. No confusion. No jumping around from one strategy to the next.
He put in the time and effort and he got it done. You can do the same. It’s not just a to do list. He knew exactly what he needed to get done, he knew what skills he needed to work on, and he went to work on them one at a time. He wasn’t just, I need to work on adjustments, and I need to work on this new strategy, and I need to work on how to hedge myself. No, he knew what order they came in, and he knew what he needed to do first in order to move up to the next one. He stayed at that one level until he did get it, until he mastered it, and then he moved up to one level. Then he mastered that one, and then he moved to the top.
Like he said, he won the World Series within a year. It doesn’t take that long to move up the pyramid, and for them he was doing it full-time, and he wasn’t married, didn’t have kids at the time, and so he had all the time in the world to devote to it. If that’s you, great. Go all in, go 100%. Most of us are not like that. We’re going to have to take it a little bit slower. If it takes more than a year to be a master trader, that’s okay. It takes two years, five years, 10 years. It’s okay. As long as we’re getting better, as long as things are improving, we see the light at the end of the tunnel, and we’re getting better, and we’re improving, and that’s more fun than actually making the money. Making the money is great, having the good trade is awesome, but when you are getting better and better as a traitor, that’s when it gets really, really exciting.
I say this all the time. I’m going to go on a little bit of a tangent here, but I keep saying that when you have a watch list of stocks, when you’re watching certain stocks and you’ve been watching them in their charts, and you see how they behave for maybe six months, a year, two years, three years, you have a sixth sense, it developed somehow, I can’t even explain it, but you have an ability to tell how that stock is going to react. If good earnings comes out and the stock moves in a certain way, you’ll be able to predict in advance, okay, if earnings are good, this is what should happen.
If earnings are bad, this is what should happen. If the opposite happens, ding, ding, ding, alarm bells goes off and say, “Wait a minute, something’s going on here, I need to investigate.” Even if it’s something that moves in your favor. I think that having that watchlist is really, really important. You have that sixth sense. That’s what they say in poker as well, the more you do it, the more experience you have, the more you can tell that Daniel Negreanu guy, he can predict what people have in their hands, the two hold cards, not because they told him, are not because he can see through the cards, or he is a mind reader, but he can tell by the way they play. How much money do they put in the pot? Do they have any tells, meaning are they nervous? Are they fidgety? Are they showing strength? Are they showing weakness? Those are all ways that these people tell and how they get better at poker.
It’s the same thing with trading. We have our own tells, we have our own ways to develop experience. Then there was this one more thing that I noticed in this interview with Phil. I know that I said there were two things, so count this one as a bonus. There was a time when Phil was already famous, and he was on top of the world, he was going to all these parties, he knew all these big stars and celebrities, but when he was playing, he was screwing up, badly. He was losing a lot of money, but at that point, he was still really, really cocky. That was a point where a friend pulled him aside and got him back on track. He did that by making him realize that all of the glamour, and the fame, and all the money, all that stuff was not what was really important. The bedrock of his success, and the stuff that’s always going to be there was his family. That was his real foundation.
Once he had that epiphany, once Phil realized that, he’s like, “Oh, wow, that’s really cool.” Because at that point in the interview, he was like, “When I realized this, I even changed my phone.” On his phone he had two pictures, one was a picture of him and George Bush, and one was a picture of him and Bill Clinton. Doesn’t matter if you were Republican or Democrat, he had you covered either way, he had these two pictures on his phone.
Once he realized this, he took those pictures off, because why would you have a picture of yourself with the president except to show off. It’s like an ego thing. Oh yeah, hey, I know these guys, they’re friends of mine, I know them, I hang out with them. It’s an ego thing. He took those pictures off, and he had one picture with his wife, and the other picture he had with him and his kids.
Every time he would turn his phone on he would see these pictures. That’s what brought him back to reality. He changed his ways. Almost instantaneously he changed. He put more importance on his family, and essentially what happened is that he got out of his losing streak, and he made, actually, he did four times better than he had ever done before. He had amazing success when he went back to basics, when he went back to what’s important. That was the third thing that I wanted to point out. From what I could tell about this interview, all of the stories that I shared with you are covered in this book that he is just written called Poker Brat. If you’re interested in the complete story, go pick it up.
I’m sure you’ll learn a lot of things in there, because like I said, trading and playing poker are very similar. Get it from Amazon, or whatever. That does it for this episode, folks. I hope that you got a lot out of this interview, I did. I think the pyramid idea is really, really smart, and a much better way to do it to plot out your progress, and what you need to accomplish than, say, to do list.
Because I got to do lists all over the place. I have so many to do lists, my to do lists have to do lists. I run out of space on one sheet, then I have another one, then I got another one. I have so many of them that I don’t get to all of them. I’m looking around at my table right now, and I see one, two, three, four, five to do lists, no, wait, there’s more. There six, seven, eight.
There are eight to do lists right in front of me as I’m doing this. This is on my main table, my main desk. Gees, nine, make it nine. I’m not even looking for them, these are just the ones that I can see. Oh man, that’s scary. I want to implement this pyramid thing, I think it’s an awesome strategy. You actually plot your progress, which is an awesome thing, but then you can find out where your weaknesses are. I’m going to try that, I’m going to try the method. I already believe firmly in money management. What we talked about at the beginning of the episode. It’s super important to poker, and it’s super important to trading, and it’s just about in any financial pursuit, especially if you’re running a business. Money management, you got to have it otherwise you’re going to go broke. Folks, that’s it for this episode. Until next time, remember, trade with the odds in your favor.