Poker and Trading Fundamentals

by Van K. Tharp

October 18, 2018

A note to readers: While Dr. Tharp’s content is timeless, this article is from our newsletter archive and may contain outdated information, missing links or images.

I love playing poker and one reason is that I think it’s very much like trading.

When starting out in poker, you have to assess your initial hand and bet it only if it is above average. Interestingly enough, most beginners play every hand and many people who think they are not beginners still play every hand.

Let’s look at an example. I had a computer simulation run of 10 million hands of poker with 10 people playing to determine how likely any starting hand was of winning. This means that in the simulation everyone stays to see the last card. There are basically 169 different starting hands and I have them ranked in order of their likelihood of winning. Those hands include 13 pairs, the suited combinations such as AJ suited (s), and the unsuited (u) combinations. The best hand, of course, is AA. But how many times do you think AA will win against 9 other players if nobody folds and all the cards are dealt. The book I read said 86% of the time, but that was way off.

Most novices like to play Ace plus anything. But if you are talking about unsuited combinations, then only the combinations AK unsuited (u), AQu, AJu, and A10u fall within the first 50 hands. And only A8u and A9u fall within the next 25 hands. And if you are talking about something like A2 unsuited—it doesn’t even rank in the top 100 hands (out of 169). Yet people play it all the time. It sort of like what happens when some analyst makes a recommendation on television: most people want to buy that stock even though it’s probably a dog. Well, A2 unsuited is definitely a dog of a poker hand.

Misunderstanding the Value of Hands

I started looking at the top poker hands that I play in terms of how often I play them and how well I do with them. And what I found out startled me. First, I know that hands consisting of an Ace (A) plus another card of a different suit (below a ten) are not nearly as valuable as most people think. But what I found out is that even though I know that, I’m still more likely to play them.

Let’s look a two examples. The first one is A9 unsuited. It ranks as the 63rd ranked hand (out of 169 possible holdem hands), but I played it more than any other hand ranked above it. Hmm.

Or how about A7 unsuited? That hand is the 82nd ranked hand…. so near the middle of pack. But I’ve played it 8 times. In contrast, let’s look at another hand that’s much stronger, but doesn’t stand out—K7 of the same suit. It’s the 42nd ranked hand, but I’ve never played it. Now it’s possible that I’ve never seen one, but it is much more likely that it didn’t stand out as a hand I wanted to play and just threw it away.

One is much more likely to play weaker hands that stand out than stronger hands that don’t stand out. And if that applies to poker, it certainly applies to trading. What happens when a stock is recommended on CNBC. It might be a dog of a stock, but it suddenly stands out, and people are likely to buy it.

The first key fundamental is that I only play the top 50 hands. Now those top 50 hands occur about 22.8% of the time, so I fold a lot. And by the way, many poker pros only bet between 20% and 25% of the hands.

The next thing I like to do is to make sure that the hand is improved by the next three cards (the flop). For example, if you have an AKs (which ranks as the 4th best hand with 10 plays) and the flop is 3 7 10 of other suits, chances are that someone else has you beat. Your hand wasn’t improved, so fold.

Now a high starting pair is a different story. If you have a KK as your starting hand and the next thing to assess is whether you can be beaten by the flop. If a lot of people call you (perhaps one or two with an ace and anything else), then if an Ace flops, you are probably beaten. And if the betting on the next round shows it, be willing to fold your kings. However, this also says that if you have a high starting hand like KK, you should be big enough to force most of the other players out. With a big bet, hopefully the A plus anything players will fold.

Thus, the second key fundamental is to only stay in the hand when the flop improves your hand or you are pretty sure you still have the best hand after the flop.

The next thing to consider is the odds of making your great hand. Here you need to understand the concepts of outs. Let’s say you play J9s (this is the 34th highest hand with 10 players). When the flop comes up, you have two more cards of your suit. You only need one more card to get a flush, which would probably win.

So let’s look at the odds. You’ve seen five cards (your pocket cards plus the three on the flop), so there are 47 cards you have not seen. Of those 47 cards, there are nine remaining cards in your suit. Thus, your chances of drawing a flush on the next card are 9 of 47 (19.15). And if you don’t get it then, your chances of drawing it are 9 of 46 on the last card (19.57). Thus, your chances of getting the flush are 38.72%. Now if there are 500 chips in the pot and your opponent bets 100, then you only have to bet 100 chips to get 600 and with 5 to 1 odds on the next card it is a good bet. So what you need to do is calculate your odds of making your hand and what odds the pot will pay you if you win. Does the bet make sense? If so, then do it.

Similarly, if you see a potential flush draw on the board and you have a high pair, then you don’t want your opponent drawing the flush. If there is 500 in chips in the pot and you bet 1000, then your opponent has to bet 1000 to win 1500 chips. His odds are 1:1.5 and that certainly doesn’t justify seeing if you get a card that will come up about one in five times.

Thus, the third key fundamental is to make sure the odds are in your favor when you bet. Keeping the odds in your favor will make you a winner in the long run. And this is a lot like expectancy in the market.

Of course, there are other key fundamentals, such as:

  • knowing the other players, and mixing up your play so that others will not find you predictable,
  • bluffing occasionally (or a lot depending upon who the other players are), and
  • knowing the power of position (when you bet) because the last player to bet has a clear advantage over everyone else.

These concepts are beyond the scope of this simple article. To understand these principles better, I’d recommend a good book, such as anything by David Sklansky or Dan Harrington. Read the simple books before you read the advanced books.

Hand Value Depends upon the Number of Players

One of the comments to my poker entry on my blog (www.smarttraderblog.com) mentioned how good an Ace is heads up. Well, we now have the data on heads up from 10 million simulations. When there are ten players, A2 ranks 101 out of 169 possible hands. However, when there are just two players, it ranks as the 46th best hand.

It just shows the importance of the context.

Incidentally, remember that there are 169 possible poker hands. The unsuited hands are the most likely, the pairs are the next most probable, and the suited hands are the least likely. But because the suited hands and the pairs are the least likely to occur, it creates an interesting statistic that you should know. The top 100 hands will be dealt about 44.8% of the time. The bottom 69 hands will be dealt 55.2% of the time. This means that you need to be patient. In trading, good trends happen about 15% of the time, so there is an interesting similarity.

Ego and Poker Playing

Two days in a row I entered into tournaments. On the first day I played in a $5 tournament with 280 players. I can’t even remember cashing in on such a tournament, but I know I can last a long time, and the most I’d lose is $5. The tournament started at 2:30 PM and I was playing until almost 7PM. The reason is that I not only made it to the “make money” level, but I finished second. Prior to that my best finish was 8th place in a tournament with 115 players. In that one, I had a chance to win because I was second in chips when the final table started. But I ended up going against the chip leader all in on the first hand. I lost on the river and ending up making $195 by finishing 8th. It cost me $20 to make $195. In this tournament, it cost me $5 to make $231. It was a new record day for me.

But the story is not over. The next day, I did the same thing. I entered the same tournament, but I finished first out of 343 players and doubled my record payday. Coming in second on Friday made me think I was lucky. Coming in first and second on two consecutive days made me think I was pretty good. However, the next day I played in three little tournaments in which the top three of nine get paid. I didn’t make money in any of those and in the first one I was eliminated first.

A big ego hinders trading and playing poker.

Leave a Comment

Your email address will not be published. Required fields are marked *

Shopping Cart
Scroll to Top