In these days of currency debasement, some would say “cash is trash.”
And yet, there’s nothing quite like a freshly minted brick of c-notes — $10,000 in crisp cash — nicely filling the groove in your palm.
Yours truly was reminded of that feeling with a recent 5-figure cash at a World Series of Poker regional tournament event.
We expect plenty more final tables to come… and in light of that, it seems timely to roll out part II of the RENO series. (It’s been a year since the first one, but hey — sometimes we get sidetracked.)
Part I described the RENO acronym — Range, Equity, Narrative, Odds — and the general application to both poker and trading. In part two we’ll talk about “the four types of equity.”
Not equity as in common stock equity, but rather situational equity… the cumulative advantages, or disadvantages, that are present in a poker hand (or a trading scenario).
In part I we described it like this:
- Equity speaks to the advantages you bring to the hand. For example, if you have “position equity,” your ability to act last in the hand amounts to an informational edge. If you have “hand equity,” it means your holding is strong in the conventional sense (a strong starter hand). “What’s my equity,” i.e. your empirical justification for putting chips at risk, is an important question we’ll discuss further via the second acronym.
“Ship It”: exclamation made after winning a big pot, i.e. in poker.
- Urban Dictionary
We’ve already established RENO as the main acronym: Range, Equity, Narrative, Odds.
So here is the second acronym: SHIP.
Delving deeper into equity — with SHIP — we have Stack equity, Hand equity, Image equity, and Position equity.
- Stack Equity: How does your chip stack size up to your opponent’s? Smaller stacks are more vulnerable to volatile swings. Larger stacks have greater ability to both 1) absorb volatility and 2) dole out volatility as punishment. Small stacks get called more often, due to a lack of “firepower” behind; large stacks are respected, and challenged less often, because of the damage they can do on future streets. In poker tournaments especially, stack size considerations are dynamic and critical.
- Hand Equity: What is the strength of your hand — the actual cards you are holding? This is the most straightforward aspect of situational analysis. If you are dealt Aces or Kings, you can raise heavily (or push all in) from any position, and (in most cases) go up against any player at the table. A pair of sevens on the other hand, or a highly speculative hand such as 8-9 suited, would require much more consideration.
- Image Equity: How are you perceived at the table? If you have been playing an extremely conservative style, folding hand after hand for the past two hours, you may be perceived as “tight,” in which case your opponents are more likely to accept a credible bluff. Tight image equity allows you to make moves (pick spots) to take down large pots with nothing. Conversely, if you have been playing hand after hand and showing a wide range of holdings, you may be perceived as “loose”… in which case your ideal scenario is betting a very strong hand when opponents don’t believe you — thus getting paid off by sherriffs determined to “look you up”.
- Position Equity. As Tommy Angelo observes, “saying that position is important at poker is like saying that altitude is important at flying, or that water is important at swimming.” Position is the ability to act last (or close to last) in a hand, giving the advantage of information flow: He who acts last can first assess the actions of his opponent, whereas the player acting first does not know what his opponent will do.
The basic idea is that, the more equity you have, the more reason you have to play the hand. It isn’t necessary to be high in all four categories — for example, under the right circumstances it could make sense to play with a hand equity of zero (large stack, great position, fearsome image, great read on your opponent, allowing a raise with any two cards).
But if your cumulative equity is not high enough, or you otherwise get a red light, it makes sense to reduce risk and fold. Having a process for considering all these elements (including the as yet undiscussed Narrative and Odds) is invaluable in the heat of the moment.
So how does all this cross over to trading?
For one thing, poker and trading are similar in the need to simplify complex environments on the fly. As the book Decision Traps observes:
“Everyone, from the greatest genius to the most ordinary clerk, has to adopt mental frameworks that simplify and structure the information encountered in the world.”
In trading, stack equity could relate to your available risk capital and/or the available risk (volatility) in the market.
Having a large stack would be akin to having risk capital accumulated. A trader who is sitting on big profits for the year, for example, might have an easier time risking 3% on a speculative trade than a trader who is flat to down 10%.
The volatility of the market could also stand in for the volatility of one’s opponent. Trading in wild and woolly conditions is like playing at a loose aggressive table with the chips flying — you had better be comfortable with some wild action, and prepared for it beforehand.
Hand equity of course synchs up with the quality of the trade. Some trading ideas are so powerful and compelling, the general backdrop doesn’t matter at all: These are the trades with high hand equity, like holding AA or KK before the flop. Other trades are far less of a sure thing, and may demand a very specific set of market conditions to execute.
Image equity is the toughest to translate, because the market is a faceless opponent. But a trader can self-assess based on many of the factors poker players observe in their opponents: Is the trader acting strong? Is he acting weak? Is there a presence of calm and relaxed confidence… or high strung nerves and creeping fear? Traders can also benefit by playing against type when it comes to mass market psychology; be greedy when others are fearful (loose when opponents are tight), and fearful when others are greedy (tight when they are loose).
Position equity relates to the timing of a trade, or the decision making process of when to make a big investment. At the poker table, risking your chips “out of position” can get you in trouble. Similarly in markets, coming into a trade too early, or anticipating a turn that hasn’t happened yet, can feed the same problems. The poker player with position equity has the informational advantage of acting behind his opponents. The trader with position equity has similarly waited for the key tell to reveal itself — for Mr. Market to tip his hand — before putting meaningful capital at risk.
The SHIP acronym, along with RENO, is one I use in actual poker play. It takes no more than a few seconds to run through key factors before making an important decision at the table. (Narrative and odds factor in too, which we’ll talk more about later.)
Whether or not you feel inspired to use this rundown in your own trading (or poker playing), hopefully you can see the value in creating a routine process for situational analysis… a way to quickly and efficiently check off the key factors in a complex decision situation, whatever that may be.