Hikaru Nakamura and the Stock Market

  • Filter
  • Time
  • Show
Clear All
new posts

  • Hikaru Nakamura and the Stock Market

    Hikaru Nakamura and the Stock Market

    June 4, 2017

    On April 25, 2017 Nakamura gave an interview to Joe Weisenthal at Bloomberg L.P.:



    What does it take to be a professional chess player?

    Naka: There is a ranking system and roughly the top 25 to 30 players in the world make a good living and most below that struggle at being professionals or teach chess. I am among the elite group that makes a good living from chess. You play a lot of tournament, there are prizes and the ultimate goal is to play for the World Championship.

    In addition to playing chess, you are also an avid options trader, you are trading all the time and you tweet regularly about your trades. How did you get into that?

    Naka: I have always been fascinated by the markets in general. In the past few years I have started to do more than equities and have been looking at patterns, strategies as well, doing research and making good decisions with some risk management involved as well.

    What is the intellectual overlap between being good at chess and trading?

    Naka: A lot of it is the analytical aspect. In chess, you try to look ahead, look at all the possibilities and then make the best decision.

    In trading it’s the same, you have to find out what can happen, what are the possible events, look at best case scenario, the worst case scenario – you think ahead and there is planning, planning is the big similarity.

    In chess, you can see the outcome and calculate ahead. In the market, you can make sound trades and still lose lots of money. How do you bridge the game between the two?

    Naka: In chess, if you make the best decisions, good things happen no matter what, in the market, if something goes wrong, it goes wrong. In chess, if something goes wrong, you try to cut your losses, you try to find a way to salvage a position even if you are much worse, you try everything you can not to lose. The same thing applies to trading, you cannot avoid losing money, you can still cut your losses and still make the best of a bad situation.

    The principals of risk management in different arenas applies to both?

    Naka: That is also is what makes the difference between a weak chess player and a strong one. Knowing when to cut your losses, when to take certain risks and when not to. It’s a complete overlap and applies 100% to trading as well.

    GM Greg Serper watched the interview and wrote a column about it:


    At one point he says this:

    At first I was completely puzzled by this statement, which is basically an oxymoron! Let me explain. In financial terms, "cut your losses" actually means to accept your losses! The biggest sin a trader can commit is to keep holding a losing position, desperately hoping that fortune will turn. When you "cut your losses," you close the sinking position, register a loss of money and deploy the remaining capital somewhere else.

    Trying to deny a loss and do everything you can to avoid the loss is the surest way to lose everything!

    As an experienced options trader, Nakamura definitely knows what he is talking about, so what did he mean then? Later in the interview Hikaru mentions that you need to know when to take a risk and when you shouldn't. That's what makes a difference between weak chess players and strong chess players, according to Nakamura.

    And Serper illustrates some of his comments with positions from Nakamura games. Notable is Beliavsky-Nakamura, Amsterdam, 2009


    where Naka abandons his queenside and concentrates his attack on the opposite side of the board.


    One observation:

    Nakamura selectively tweeting about his hits isn't very indicative of his overall success when it comes to trading.

    One of the first to comment on the article was Nakamura himself:

    First, I have to say that I find all of these comments both hilarious and flattering in some form or another. That being said, I do not believe talent simply transfers from one field to another. One has to be dedicated and put in a lot of time. I will say that I think playing games (chess,poker,backgammon and magic all come to mind) do tend to favor a certain type of skill set which can be beneficial for trading. However, in no way shape or form can one go from one field to another and just be great. Life just doesn't work like that. If it did, I'd go win the main event at the WSOP. Oh wait, I tried that and I busted KK vs 88 preflop right before the end of day 2!

    I'm not really sure what the point of this article is implying, but as someone who knows myself, I would say that in fact the differences are becoming larger between chess and trading (equities, options, etc). More often than not, the goal is to reduce risk and situations of chance. For example, my game against Beliavsky was great, but if I did that same thing nowadays, the probability of success is likely somewhere around 10-20% with maybe 25-30% reaching a "game" and getting blown off the board due to pure computer preparation at around at least 50-55%. Those are not favorable odds to say the least.

    Sure, I've known about various options techniques (condors, straddles, strangles, ratio's, butterfly's and collars to name a few) for quite some time, but one has to study a lot and understand what's appropriate for each situation and a lot of this involves understanding the "Greeks" as well. So it is anything but straight-forward and to make matters worse, if you do the wrong strategy (IE not purely directional) and get hit with unlimited upside or downside risk, it's not exactly a laughing matter either.

    Bottom line, there are similarities between chess and trading, but to suggest I (or for that matter anyone else) has some master strategy mapped out is overthinking the situation.

    Oh, and @Zinsch you are absolutely right about selective tweets not showing the whole story! I think tweeting only about options trades would be fairly boring, as chess is still my main job and I'm not trying to start a newsletter or a hedge fund. When I start tweeting about that every day, you'll know why!

    From an earlier interview:

    Most of my non-chess time (excluding minor activities) is spent on trading derivatives in the stock market, so I do often consider whether that would be a more logical career.

    Last edited by Wayne Komer; Sunday, 4th June, 2017, 02:51 PM.