Let me tell you about one of the most eye-opening poker sessions I ever had. (This was some years back.)

It was a four-handed cash game, $3-$5 No Limit hold ‘em. The big stack had at least $3,000 behind — the others (including me) around $1,000.

The game had previously been seven-handed, but I came in late as others were leaving. The remaining players were happy to see me, as the game might have broken up otherwise.

Within minutes of sitting down, I realized something was different — and possibly very wrong. All three of these guys were Maniacs, with a capital “M.”

One of them, a very friendly local I knew, was a California dentist who threw c-notes around like confetti. (He was the one with $3,000, most of it in a fat sheath of hundred dollar bills.)

Another was a young drunk, ordering a Guinness every ten minutes. And the third was a super-aggressive tourist, who apparently learned the game by watching the “big moves” on TV and wanted to prove his manhood to us all.

Normally it’s good to have a maniac, or even a handful of them, at your table. Wild and ill-considered action translates to opportunity in the right circumstances.

But the best setup is when the maniacs are dispersed among calmer targets, with other, less wild participants around to create a sense of balance.

In this instance, it was me and the three crazies. Big bets started flying around immediately, green bills topping off outsized pots. Raise and reraise became standard, even with garbage like Queen-Deuce.

I realized fairly quickly that calm, cool methods of strategy assessment were nullified in this environment. The game was like a machine gun firefight — chips spraying everywhere, with no obstacles to hide behind.

I stuck around out of curiosity at first, having never experienced such pure unadulterated mayhem in a cash game. The action was even sped up, like a record played at 78 RPM, because it was only four-handed and the button moved rapidly.

It quickly became clear I suffered a disadvantage though: I was the only one who cared about my chips!

By “cared about my chips,” I don’t mean I was attached to the money. Rather, I was attached to the notion of making intelligent, positive-expectation moves, rather than juggling hand grenades for a thrill.

In poker, volatility is a weapon. It can be an especially powerful weapon in the hands of the deranged. The ones who wield it most effectively either 1) have a very large stack relative to yours, or 2) have minimal personal regard for their own financial well being.

To wit, if your opponent doesn’t care about fragging his own chip stack in pursuit of yours, he can use that as an advantage. Even insanity can be an edge — temporarily at least.

Having identified the situation, I should have smiled and walked away. Instead I focused on the possibility that the right string of hands could build my stack very quickly. After all, these guys were spewing chips like fire hydrants — taking big chunks from each other and giving it right back.

Alas, the stack-building was not to be. I didn’t get the right opportunities, and the volatility was just too extreme. My controlled risk forays were rebuffed by the poker gods; I walked away a few hundred bucks lighter and a lot wiser.

When guys are happy to raise half their stack on a pair of deuces, you wait for the crystal clear opportunity to snap them off with a monster holding. Other than that, you show patience and stand aside — or you get the fever yourself and lose any semblance of intelligent play.

Recent market action brings forth memories of that old maniac session. Consider this from Bespoke:

We consider ‘all or nothing’ days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400.  Including today’s reading of 491, there have now been 12 all or nothing days in the last four weeks (20 trading days).  Going back to 1990, there has only been one other period where the frequency of all or nothing days over a four week period was at or above the current level and that occurred in the Fall of 2008.

The Fall of 2008 was great — for those who knew how to sell short, and caught the cascade early, in the waterfall decline portion of the move. After the freefall — during the time of the TARP vote for example — it turned into maniac city. There was time for action and time for stepping back.

Wild play can be good. As a general rule you want “action players,” or maniacs, at your table. But sometimes wild can be TOO wild. If the ‘natural order of things’ has bled so far into chaos that it’s hard to keep a bead on what’s happening, watch out.

The short-hand rules for dealing with maniacs are these:

• Stay calm, cool and collected.
• Play fewer hands — pick spots more selectively.
• Be prepared for high volatility.
• Be prepared to hit hard (maximize opportunity).
• Know when to step aside.

Some poker players feel it is their duty to mix it up with maniacs — just as some traders feel it is their duty to make hay from extremely volatile market conditions.

But this blanket assumption — “if the action is hot, I’ve got to be in” — is not smart. It’s a case by case thing, depending on the situation and your particular context within it.

For example: A cold maniac can be a beautiful thing, donating rack after rack of chips to your cause, then digging in his pocket to donate more. But a hot maniac, or worse yet a gang of them, can steamroll  you flatter than a pancake.

Similarly in trading, there are good high volatility environments and bad high volatility environments, depending on factors like how in synch you are with events and whether conditions favor the way you trade.

JS

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