Wisdom of Johnny Chan

Johnny Chan has been writing for Trader Monthly for awhile now and I don't think a month goes by that I don't learn something interesting and/or confirm something I've discovered on my own from his monthly column.

The first time I learned about Chan was from the 1998 movie Rounders. (A good movie by the way if you haven't seen it.) In case you don't know who he is, Johnny Chan is a star poker player who has one of the best track records in his game. In fact, through this year, Chan has won over $5,700,000 in live tournaments winnings. That's pretty impressive stuff and his mental approach, though not a stock trader, is extremely valuable.

For example, in September's column "Steal The Playbook," Chan provides the following insight:

When big money is on the line, it's imperative that you know your market -- cold. In poker, the number of people playing for top-of-the-pyramid stakes is relatively small. In other words, you'll spend a lot of time facing the same players. The same goes for financial markets -- in theory, there are an infinite number of contracts to trade. In practice, only a few dozen count.

On any given day, I might find myself up against four or five of the world's best players and one or two very talented amateurs. I'll probably have thousands of hours logged against each of the top pros, and tens or hundreds against the amateurs. I spend that time closely studying each player under a wide range of circumstances. Research is the key to predicting when the money flies.

For me, such research stems from discipline. Early in my career, I decided to examine and understand one new player a month. That might not seem like much, but I would carefully select my monthly research project, then spend the majority of the time I was in a game with him studying his every move. I'd pay attention to the other players as well, but whenever it wasn't necessary for me to be watching one of them, I'd pay attention to what my current subject was doing and ask myself questions: What is he thinking? What is he most likely to do in this situation? Every time he played a hand, I'd try to call it, regardless of whether I was in the pot or not. Even hands I was beaten on could be chalked up as loss leaders. You would be amazed, as the month drew to a close, at how accurate I had become at reading that opponent.

How could I spend so much time on one person? Remember, I play in some of the highest-stakes games around. The pool of players from which these games draw is not nearly as large as for most other public games. After a couple of years, I already knew how 20 or 30 of the top pros played. Each year that figure grew.

Eventually, by knowing the players, I could predict where the game was going. Work early in my career paid off down the road. I no longer needed to spend much time on most of the players in the game unless I was specifically involved in a hand with them. These days, I have an extremely accurate understanding of how almost all the top players think, and most of the time it's second nature for me to guess what they're holding.

Using this knowledge as a base, when a new player comes along, I can easily spend the necessary time to pick up on his style. I can also apply all the research I’ve accumulated over the years to the way a new player acts. In short, all the time I've methodically invested in understanding the thoughts of my regular opponents pays me big dividends every single session.

This type of analysis is similar to what many great traders do. They spend most of their time trading a particular contract until they feel they understand its movement so well they could trade it in their sleep. Then they add another contract to the mix and learn it until they know it equally well. Eventually, they'll have assembled a list of 20 or 30 contracts, each of which they feel entirely comfortable trading.

Then, on any given day, according to news or macroeconomics, they'll pick the ones they believe offer the most profit and concentrate on those. Some of the most successful traders in the world make money from a fixed set of contracts with which they're so familiar that they can predict the contracts' reactions to specific events. Those are the guys who would make first-rate professional poker players. They've just figured out a way to make more money with the same skill set.

It is columns like this that make Chan one of my favorite offline reads. And, if you're a professional trader, you can receive the magazine (and his column) for free.