Sam Trabucco – How to Trade Like Alameda

Market Meditations | May 27, 2021

Institutions see a correlation between trading and strategic games. Strategy games include poker and any other scenarios that require you to make fast decisions under uncertainty and to understand probability. These are great to train your mindset, before you have skin in the game. Specifically, you are geared to stop thinking about outcomes. New traders often don’t realise that it is ok to lose money.

Losses are a normal part of the game, provided you cut them while they are still small and don’t hold on to a losing position. Some conventional poker wisdom: never risk more than 5% of your entire portfolio on one trade. The same applies to trading. If you don’t manage your bankroll properly, there are 2 outcomes:

  1. You’ll lose your funds and be wiped out the market 
  2. You’ll have no dry power and when a big opportunity arises, you’ll be left on the sidelines.

You’re aiming for 6 out of 10 profitable trades.

Strategy games help shift your focus to the choices that were made. To understand what made your trade successful or unsuccessful. And to apply those lessons to future decisions. An important reflection is always your ability to have assessed the probability outcomes in a trade.

Any bet that has probabilities and payouts (such as trading) has an Expected Value (EV).

Consider a coin flip where you win 2 dollars if it’s heads and lose 1 dollar if it’s tails.

The EV will be ($2 x 0.5) + (-$1 x 0.5) = 50 cents.

The more positive the EV, the better the bet is.

Managing your losses and applying leverage with caution somewhat addresses how to manage your risk. Another important consideration is how much to risk in the first instance. This comes down to your own life goals. When you are young, risk of ruin is significantly less important as you have a longer time frame to increase your net worth. You are therefore able to take on riskier opportunities, even if you risk your net worth dropping significantly.