Expectancy explained through Poker

I have been taping the 2005 US Poker Championships on ESPN with my DVR because I love to watch Texas hold ‘em. Most of you know by now that I love to play the game too. As the episode ended last night, they put up a stat that caught my attention even though I was starting to doze off. I paused the show, wrote down the statistics and thought to myself that it would serve as an excellent example on expectancy.

As you already know, a positive or negative expectancy can be achieved in multiple ways and the number of losers versus the number of winners does not matter so much when considering them individually. The power of expectancy takes place when you combine the percentage of winners and the size of the winner versus the percentage of losers and the size of the losers.

For more on expectancy please visit this post.
Also check out my expectancy calculator.

Poker expectancy example (this relates directly to trading):
Nine players at the table
34 total hands were played in this round

Player A saw the flop 28 of 34 hands or 82% of the time
Player A won hands 16 out of 28 tries for a 57% winning percentage

Player B saw the flop 11 of 34 hands or 32% of the time
Player B won hands 4 out of 11 tries for a 36% winning percentage

Looking at these numbers and assuming that both players had equal chips (they were close), who do you think made more money during the round?

Most people would guess Player A due to the 57% winning percentage on 16 hands. Player B fails in comparison with only 4 wins, a quarter of the wins of Player A.

Well, Player A actually had a net loss of 5,500 chips
While Player B actually had a net gain of 10,000 chips.

So what is my point?

The point is that being more active or less active is not a way to guarantee success. You must formulate a positive expectancy system that balances the opportunities with minimal risk and maximum gain. Player B took on less opportunity but made the most of it when the opportunity arrived.

Player A was erratic and played several hands that gave him poor odds and this is what I see so many traders do when the market is weak such as now. They trade for the sake of trading and they lose. I told you yesterday that I haven’t made a trade in five weeks and I will not make one until I feel the right opportunities arrive. Until then, I battle my patience and stick to my rules so I don’t trade erratically and play the game for the sake of playing.

Now, to tie this into the current market, I want you all to look at the chart I posted on a couple forums yesterday and the daily screen last night. Several people jumped back into the market on the long side based on a “possible follow-through day” but I don’t see it and I will sit this hand out until I see the downtrend broken and the NH-NL ratio strengthened.

Piranha