There’s a scenario that plays out in Las Vegas casinos all the time…
With the strategic, serious player taking winnings from underprepared gamblers.
I love and hate all the poker analogies in trading. I hate when people think trading is about gambling, but I love when traders understand it’s all about probabilities — and stacking your chips.
Imagine walking through a Las Vegas casino near the poker tables…
You see five tables, mostly full. People are laughing and having a good time at the bar, but those around the tables (most of them, anyway) have a stern look about them. You notice the majority of the players have a mediocre stack of chips, while only a ‘lucky’ few have a giant pile — with many more players near their last bet. The guy to your right spills his drink as he laughs and throws his last chips in while yelling, “All in! Maybe I’ll get lucky this time!”
The guy with the huge pile of chips doesn’t even flinch (not that you could tell behind his sunglasses anyway). You’ve been watching him, and you can see the intention in each move — whether it’s a bet or a fold. It’s not a decision he makes on a whim. He makes his bet with a steady hand. As a bystander, you have no idea which cards either player has.
But suddenly the cards are flipped over and Mr. Big Chip Pile takes another handful of chips to his side of the table, while Mr. Daniels stumbles away laughing.
This scenario plays out over, and over again in a Las Vegas casino…
Selecting which hand to play in poker is not all that different from trading options. As traders, we go into each and every hand (or setup) with a solid idea of our probabilities and a key method for execution. Without a steady setup and the probabilities that go with it — there isn’t a good chance you’ll stack your chips. In fact, it’s more likely you’ll be the one standing there at the end with a short stack.
In any good game of poker, bets start out small and semi-regular with players folding hands when they don’t like the odds. However, what you’ll notice as the game progresses, is that typically the players that stay in the game tend to selectively pick solid hands to play and end up piling up their chips… while those that continue betting on each hand have stacks that run low.
Throughout the course of the game, what do you see happen to the players that keep betting on every hand? Well, eventually they run out of money. What happens with the players that sit patiently and wait for their moment? Somehow their stacks keep getting larger. And, as their chip pile grows, so do their bets along with their profit potential.
I find this analogy the easiest to understand when I try to explain what I mean when I say ‘Stacked Profits,’ in options trading. To me, Stacked Profits means taking what you have, sitting patiently and waiting for the right moment in time, then using what you have to make more. With patience and strategy, along with a clear execution, traders begin to take what they had and stack it up to make more.
You can use the term Stacked Profits on one trade: for example, “I paid $3.00 and closed my trade for $6.00, for a win of $3.00.” What once was $3 is now $6. That’s ‘Stacked Profits’.
You can use the term ‘Stacked Profits’ on multiple trades: for example, “I started trading with 10k and now I have 15k. I Stacked my Profits, one on top of the other.”
I also like to use it when it comes to butterflies — especially because of the 1:4 — or better, risk/reward ratio. For example, “I risked $2.00 to make $10, and I ended up making $8.00 on the trade. I Stacked my Profits!”
At the end of the day, in poker (or in trading) the idea is to use what you have and make more of it. That’s my core methodology in trading. The way I do this is by focusing on low risk, high reward option strategies along with high probability setups — particularly those that appear in big, momentum moves. In the options market, you need greater than expected moves, along with an ability to identify their patterns beforehand. You also need a method of execution, or the knowledge to stay out of that hand. For me, this means trading short squeezes and momentum moves and using butterflies and expertly picked calls. What does it mean to you? How do you stack your profits?