Top poker player offers a radical rethink on when to exit a trade

I have a problem in my day trading …

If I walk away from my screens, my automated systems will manage trades for me just fine. But if I’m sat at my desk, I want to actively day trade and eek a bit more from every setup.

That shouldn’t be an issue. I like to think that I have some know-how to do that.

But the problem is that I get paralysed.

Here’s a glimpse into the internal dialogue:

• I liked the initial setup and I want to be right
• If I change the plan now, it shows bad discipline
• And I don’t want to be wrong
• If I take profits early, it’ll negatively impact on my reward:risk ratios
• And I want to be right
• If I cut my losses, I’m not giving my trade room to breathe
• And did I mention that I want to be right?

Back in the 1970s, psychologists noted that people get entrapped in things that we’ve started, even when it’s very clear that they aren’t going well.

It’s hardwired into us. Perhaps it’s optimism … stubbornness … an urge to be proved right … or all three.

But it gets us into all kinds of trouble.

Annie Duke, the ex-pro poker player (who is still in the top-5 female earners at poker, despite having retired in 2019) explains that professional players are significantly more likely to fold than amateurs when dealt a weak hand.

They are great at quitting.

In contrast, amateurs often have a bias against giving up, viewing it as a sign of failure. We should have grit and determination, right? That’s the stuff that gets us to stick with worthwhile activities that are difficult. But it’s also the stuff that gets us stuck in dead-end jobs … toxic relationships … and bum trades.

The art of quitting

So, how do I know when to quit?

When we’re in the thick of it, our decision-making gets skewed.

Duke uses Mount Everest to demonstrate this …

Mountaineers have a turnaround time when summiting Everest. If you haven’t reached the top by 2pm, you need to turnaround. Otherwise you’ll be too late to descend safely (8 times more climbers die on the way down than the way up). By having this rule in place, it should take the decision-making out of the process of turning back.

But books have been written, and Hollywood blockbusters made about the people who failed to make the right decision to quit at this point – famously leading to the 1996 disaster on the mountain.

Little is written about the people who did make the right choice. These are the ‘quitters’ – and culturally we tend not to have much time for these people who actually made a very difficult decision.

This is Duke’s point – we shouldn’t view quitting with a negative bias. A lot of the time, it’s about taking the hard decisions and facing up to reality.

So, how do I incorporate ‘turnaround time’ logic into my trading?

The task is: to be able to reevaluate my position throughout the trade, but not be driven by the emotions that can cloud my judgement when I’ve got cash at risk.

Here are the issues that crop up most often:

• The price hasn’t behaved the way I expected, or I’ve noticed other factors that could be at play that perhaps I missed or undervalued at the beginning of the trade.
• It’s taking a very long time for the trade to play out and the short-term signal I used for an entry feels completely insignificant 2 hours down the line.
• I’m very close to my profit target, so I don’t want to risk the profits I’ve made so far, so prefer to take profits early.

Scenario 1

Let’s say that my trade on a 5-minute chart has been open for 2 hours. This is much longer than I expect. Rather than hit my target, the price has been stuck in a sideways pattern, struggling to move through a consolidation around my entry level. I’m currently showing a small loss. Should I cut and run?

Scenario 2

This time, my trade has almost reached my target, but is now moving sideways. I’m 33 pips in profit, towards a target of 35 pips. Should I just take the £330 profit I’m showing? Hold tight, risk the price moving to my stop loss, more than 60 pips away, for the sake of an extra £20 profit? Or should I move up my stop loss?

These situations crop up again and again in trading, so it shouldn’t be difficult to put a constructive plan in place that allows me to evaluate trades on the hoof – without worrying that it means I lack discipline and will be sent to the purgatory of weak-willed traders.

Setting Turnaround times

Just like the Everest climbers (although from the comfort of my chair!) I’m using time as the trigger for a reevaluation. I have a rough idea of how long my trades run for, so – if a trade is still open after, say 1 hour, I can allow myself to think about a change of plan.

If we’re going to properly re-evaluate our trades, we need to give continuing and quitting at equal seat at the negotiations.

Don’t fall into the sunk-cost trap, which tells us that “I’m down on this trade, so I need to give it a chance to recover, otherwise I’ve wasted that lost capital” … or “I’ve waiting this long with my money on the table, so I should keep leaving it at risk in the market until the trade concludes.”

Sunk cost is the trap that keeps us entrapped – silence those voices.

Instead, try to look fresh at the market and decide if you want to be in this trade or not. Bear in mind that making early exits will affect your reward:risk ratio. Taking profits early might dent your reward, but could boost your success rate. Cutting losses early, could reduce your risk levels, but your success rate could suffer. It’s a balancing act – so keep an eye on the data in your trading journal to make sure you’re improving your results, not hurting them.

Looking at those two scenarios above, it feels like an easy call. I’d close out both trades. Scenario A is a bum trade – cut losses and be ready for the next opportunity. Scenario B is not worth risking my capital for an extra £20 – take the money.

If this wild lack of discipline is making you a little uncomfortable … great!

It makes me uncomfortable too!

But I’m learning to embrace the art of quitting, evaluating my trades with a clear mind, and not being afraid to make timely decisions for better results.

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