The skills involved in playing chess have often been linked to the skills involved in making financial trades. Each activity requires focus, practice, risk management, the ability to think ahead and other transferrable skills. Hikaru Nakamura is a Chess Grandmaster and also an avid trader, utilising his skillset to achieve success in both fields.
Nakamura talks about the intellectual overlap between playing chess and trading options, discussing the analytical aspect and the need in both activities to be able to look ahead. Thibaut de Roux has a keen interest in the correlation between chess and trading, exploring the investment lessons that can be learned through an understanding of the game of chess.
Adapting to the Unknown
One area in which great chess players and successful traders share skills is in their ability to adapt to the unknown. In options trading as in chess, future outcomes can be predicted with some success, but there will always be times where play takes an unexpected turn. The best players or traders are those that are able to adapt their strategies to account for these twists and turns without stress, understanding that dealing with uncertainty is all part of the process. Chess players and options traders can each make decisions based on the way they think the opponent or the market will move, but they must be prepared for things they do not expect.
One thing that a thorough understanding of chess prepares new traders for is making decisions. Positions need to be reassessed almost continuously in both activities and the individual therefore needs to be able to make decisions quickly and often, analysing situations and making the most of each new potential opportunity. Good traders, just like good chess players, make their decisions based not only on what is happening now, but also on what is most likely to happen in the future. Even when the board or market is unfavourable, the player or trader is able to work towards a more favourable state of play by making the right decisions.
Focus on the End Game
Just as a game of chess is not over until it has reached check-mate, a trade is not over until it has been exited. Knowing the importance of the end game and knowing when the end is in sight are skills common to both chess players and options traders. Nakamura states that under both circumstances, even the very best individuals will experience losses. The key is trying to ensure that those losses are minimised and that the trader (or chess player) learns how to make the best of a bad situation.
The Poker Comparison
In one interview, Nakamura was asked if he believed chess or poker were more similar in terms of outcomes to trading. His answer was that although there are a lot of similarities, trading is more like poker than chess, as there is a higher element of luck involved. Nakamura commented on the fact that when playing chess, if he implements a certain set of quality moves, his chances of winning are exceptionally high. In poker, however, it is possible to play a hand perfectly and still lose on the draw. He concludes that novice investors must first understand that no matter how skilled they are, the markets may still move against them.