Master Your Loss Limits with Poker Chips

A Strategy for Risk Management

Risk Allocation

Have you ever played pokerI guess the answer is probably yes, but if not, I’m sure you know the game. Hats, headphones, and sunglasses to avoid giving away your ‘tell’. (Just don’t wear mirrored shades like Kim Kardashian did for a charity tournament…ffs)

In Poker, you have a stack of chips and you bet (or not) according to the quality of your hand. 

These chips have a financial value. Chips are worth between £1 and £1,000 with special high roller chips being much higher. £100,000 +

A casino’s way of removing your perception of money.

It’s far easier to throw in a plastic chip worth a grand than count out £20 notes!

How poker chips can improve your trading.

First of all, grab yourself a handful of poker chips. (Coins or other tokens will do too)

Here’s how to use them:

  1. Decide on your daily trade risk limit. eg: £600
  2. Allocate a value to each chip. (I suggest £10 or £20 if you are risking £600pd but choose to suit your current risk allocation)

Now start your trading day with your maximum chip stack on your desk. EG: 30 x £20 or 60 x £10

When you see a trade you want to take, choose the total trade risk. (You likely already have this in terms of R). Let’s say it’s £200. Now you take 20 x chips of £10 value (£200 you maths whizz…) and move those to a specific part of your desk called the “risk zone”.

This money is gone.

You have chosen to take £200 from your daily risk and ‘bet’ it on this next trade.

You hope to make back more, but you may not and you should accept that. (True risk acceptance). Repeat throughout the day until:

  1. You run out of chips (hit the daily loss limit)
  2. You are done for the day

This does a few things.

Firstly, it helps you visualise how much risk you have available and how much that will impact your ‘stack’ if you take the next trade.

It might make you think:

“Do I really want to take this trade? Is it a wise allocation of capital?”

Secondly, when that stack has taken a hit you are going to be very aware that your performance is off and your stack is shrinking. You can see the dam thing!

This might make you reduce the risk a bit on the next trade, or at the very least be a bit more mindful about pulling the trigger.

I’ve done a variation of this before to help with discipline and I’m sure this chip idea came from a fellow trader. (h/t if you are reading this).

Today, think about how you could create that physical representation of risk during your trading day.

Chips, coins, tokens, it doesn’t really matter.

All you are trying to do here is to create a slightly different way of thinking.

We are all so used to just numbers on a screen (which can become dangerously meaningless in a tilt situation!) and having something you can see, touch, and feel just brings those numbers into the ‘real world’.

Variations include:

Adding winnings as more chips. Using weekly risk limits or simply using 1 chip per trade (handy if you are trying to restrict the number of trades you take.)

Worth a try if you are working hard on your discipline and feel like you need to do something different.

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Optimise Your Trading Day

If you like the idea of optimising your trading day and perhaps trying different things to help hit peak performance, then check out a podcast I recorded with Lousie Nonweiller, a trading hypnotherapist, last year.

We took a journey through a trader’s typical day and discussed tactics to really get the best out of your trading (and avoid the worst!)