A Stop-Loss Strategy

In securities trading, a stop-loss order is an order to sell when the security falls to a certain price. For example, you buy a stock for one hundred dollars. At the same time, you enter a stop-loss order to sell it if it falls to ninety dollars. Why would anyone do this? The advantage of using this technique is that your loss is limited to ten percent of your investment, but potential gains are unlimited. There are, of course, drawbacks. Your stock may drop briefly below ninety, and then reverse direction, moving all the way up to one hundred and twenty. Your stop-loss order got you out for a ten percent loss. If you had followed a buy-and-hold strategy, you’d now have a twenty percent profit.

The poker equivalent of a stop-loss order is to set limits on the amount you can lose in any one game or session. This bankroll management strategy can only be applied in cash games. Once you’re in a tournament, you’re there until you get knocked out or win the whole thing. A typical stop-loss for a big bet game (no-limit or pot limit) might be three buy-ins. A typical stop-loss for a limit game might be 40 big bets. Is it a good idea to set stop-loss limits for yourself? There is one clear advantage to doing so. You avoid disasters. If you have a tendency to steam, tilt or otherwise fall apart when losing, following your pre-set stop-loss will allow you to escape before something really terrible happens. Virtually no one plays as well when they are losing as they do when they are winning. Not only that, but when you are losing, your opponents are winning. You are now in danger of collapse, while they are comfortably trying to play as well as they can. With a stop-loss, you avoid this situation. If you keep records of your sessions, look for patterns. (If you don’t keep records, you definitely should.) A very typical pattern is one that shows more wins than losses, but much bigger losses than wins. If your results seem to follow this pattern, a stop-loss may be an ideal tool for avoiding big losses.

Are there any disadvantages to using a stop-loss? There is one big disadvantage. Your decision whether to play or quit is being made without any consideration of the game. Several unlucky hands may cause you to arrive at your stop-loss even though you are playing very well against extremely weak opponents. This really isn’t a good time to quit, but if you are following a strict stop-loss strategy, you are supposed to stop. It is always possible; however, that it is only your inner demons telling you that you’re playing well and that they’re playing badly. Maybe you have fallen apart completely. Then your stop-loss will save you.

If you have a problem with discipline, and nearly everyone has to some extent, I’d advise you to use some sort of stop-loss strategy. My own personal method is to use a multi-level stop-loss. Early in the session, while I am still approximately even, I try to evaluate the game as mediocre, good or great. If it is bad, my tendency is to quit as soon as possible. There is no point to try and beat a bad (tough) game, when I know there will always be better opportunities. Once I have made this initial evaluation of the game, I know what my stop-loss will be. For a mediocre game, I’ll allow myself only 25 big bets in a limit game or two buy-ins in a no-limit game. For a good game, I’ll raise my stop-loss to 35 big bets or three buy-ins. If a game is really great, I give myself a lot of room. Now my stop-loss goes up to five buy-ins or 50 big bets. I know these sound high, but great games are pretty rare, and I want to make sure I have a chance to put in some hours of play. If the game is very volatile, then I’ll raise these numbers. For example, if the big bet game is pot-limit Omaha or if the fixed limit game includes triple draw and badugi in the mix, I’ll allow myself a little more flexibility.

The key point is to set your stop-loss before you sit down, or at least early in the session. You want to make that decision when your head is clear, not in the heat of the action, and especially not have you have just lost a big pot. If you are an unemotional, poker-playing “machine”, don’t bother with a stop-loss. But if you are a normal player, having one is probably a good idea. If you are someone who goes on tilt, it is an absolute necessity. When you follow your stop-loss, you’ll never have the sickening feeling of going broke in a game and wondering how you could have lost so much. ♠

Steve “Zee” Zolotow, aka The Bald Eagle, is a successful games player. He currently devotes most of his time to poker. He can be found at many major tournaments and playing on Full Tilt, as one of its pros. When escaping from poker, he hangs out in his bars on Avenue A — Nice Guy Eddie’s at Houston and Doc Holliday’s at 9th Street — in New York City.