Mathematics and statistics are important to Texas Holdem poker and online option and stock trading because they help you better understand the risk and reward of the situation. Knowing the risk and reward in turn will help you gain realistic and Healthy Expectations. This way when things are going well, you will not go crazy and expose yourself to too much risk. Conversely if things are not going well, you will not give up.
Here’s is a Texas Holdem poker example.
My worst string of losing AA was 7 in a row.
We will assume that there was only a 20% chance of losing each of the 7 pocket aces. This means statistically the chance of losing seven AAs in a row is (20%*20%*20%*20%*20%*20%*20%) = .00128% or 1 out of 78,125. Does this mean it’s wrong to play AA? Of course not, you still welcome those situations because you know that your Expected Value is positive and that you will win in the long run.
Some people would call this bad luck. But it’s just statistics. If you play 10 tables at a time at 50 hands per hour for 4 hours a day, that equals 2000 hands a day. You do this for 2 years (we’ll use estimate 300 days/year) then you would have played 600*2000 = 1,200,000. With that knowledge, it is no longer surprising that a situation that happens only 1 out of 78,125 occurred. (I’m just surprised I’ve never lost eight AAs in a row! j/k. Knock on wood.)
Our Texas Holdem poker-like option positions are the same. Even though the winning percentage is currently 100%, 3 for 3, we know that there will come a day when we will take a loss. In fact, we can expect a losing month for every four winning money if our winning percentage is 80%. But that’s okay as long as the money we gain from the four winning month is greater than the loss we take on the losing month.
Looking at the math and stats will give a lot of people headaches. But knowing the mathematics and statistics when so much money is on the line will help you sleep better at night.
