Game Theory Optimal (GTO) Trading

GTO stands for Game Theory Optimal. Game theory applies to many disciplines, but the term “GTO” became widely popular through poker over the last decade. It’s also something every trader needs to understand, whether they realize it or not.

Over the years, it’s become clear to me that most people who attempt trading have no background in game theory at all. If I had to name the single biggest reason traders fail, this would be near the top of the list.

I started playing poker with my dad and his friends when I was eight years old. Growing up, I played card games, board games, and video games constantly. That background helped me tremendously when I began day trading. The people who struggle the most with trading are often those who’ve never spent time in competitive games of any kind.

Trading Is a Poker Game in Auction Format

Day trading is essentially a poker game played through an auction.

Large trading firms behave the same way skilled poker players do—they hide their intentions. A firm may quietly accumulate a long position, then wait for a moment when upside resistance appears weakest. At that point, it fires aggressive buy orders into higher prices to trigger a reaction.

Once other participants start chasing the move, the firm scales out of its position into that buying pressure.

They create the move—and then they profit from it.

That’s not manipulation. That’s outplaying the table.

Macro to Micro

One phrase I use constantly in my teaching is “macro to micro.”

First, you develop a read on the macro picture.

Then, you fine-tune execution using the micro.

If a market keeps making new highs, pulls back only modestly, and then pushes higher again, the macro message is clear: maintain a long bias. Trying to short into that environment is a great way to get run over repeatedly.

From the micro perspective, the play becomes short-term long trades with momentum—entering on strength, exiting on the first meaningful pullback, and repeating the process until it stops working.

You’re adapting to how the game is currently being played.

If price action becomes erratic, with no structure or follow-through, the macro picture is telling you to stay out. In that case, there is no micro decision to make—because there is no trade.

The First GTO Question: Should I Trade?

From a game theory standpoint, the first question is not how to trade—it’s whether you should trade at all.

If the environment makes sense, the second question becomes:

How do I extract the maximum amount from this situation?

In day trading, you’re constantly evaluating the most likely scenario over the next few minutes. When the macro aligns and you’re clearly on the right side of a strong move—say you’re long and price keeps accelerating—you want to capitalize fully. That may mean increasing size and pressing the advantage until momentum fades.

In contrast, if the market is choppy and loosely range-bound, trading may still make sense—but scaling up usually doesn’t. The optimal micro play might be smaller size and quicker exits.

I’m always reassessing the macro. Based on price action and liquidity, what’s most likely to happen next?

Macro understanding helps anticipate the future.

Micro execution helps maximize gains and minimize losses.

A Critical Rule

Never average into losers.

Nearly everyone who tries it loses money over time.

Product Selection Is Part of Optimization

Game theory also applies to what you trade.

Some markets are easier to read than others. Watching multiple products over time reveals their strengths and weaknesses. When you’re starting out, it’s a mistake to lock yourself into a single product.

Specialization can come later—but only after you understand the nuances of several markets.

Liquidity and volatility change. A product that trades beautifully for six months may become frustrating for the next three. When conditions change, shifting focus to a different market can be the optimal decision.

Most people who contact me are determined to trade only the ES (or micro ES). They have no idea how difficult it is to trade the ES consistently. It can be done—but many other products are easier to read and cheaper to trade.

I’ve seen plenty of traders abandon the ES in favor of Treasuries or highly liquid stocks and ETFs—and dramatically improve their results.

Poker Examples That Explain GTO

Example 1:

I’m playing $5/$10 no-limit Hold’em and I’m dealt 7–2 offsuit, the worst starting hand in poker. Someone raises. I fold.

GTO dictates never playing that hand.

This is the same as:

• trading a dead market
• holding a position into a major economic release

Easy fold. Bad trade.

Example 2:

I’m dealt 10–9 of hearts. One player raises to $40, and I’ll be in position for the entire hand. I call.

That’s the macro.

The flop comes A–J–2 with two hearts. I flop a flush draw. My opponent bets $250.

GTO says fold.

Yes, I might hit the flush—but the odds are wrong. There’s not enough money in the pot, and if I do hit it, my opponent likely won’t pay me. Calling now probably commits me to calling again on the turn at even worse odds.

That’s the micro decision.

Example 3:

Same hand—10–9 of hearts. Same opponent. I call.

The flop is 6–7–8 rainbow. I flop the nuts.

This is where game theory really comes into play.

My opponent bets $200. I know he’s aggressive. If I raise, he may fold. If I call, he may continue betting.

I call.

The turn checks through. The river comes, and I still have the best possible hand. He bets $300 and has $1,000 behind.

Now the micro decision becomes:

How much can I extract?

• Will he call a minimum raise?
• Will a large raise look like a bluff?
• Is there a middle size that maximizes the chance of getting paid?

This is GTO in action—balancing extraction against risk of getting nothing.

The Second Lesson: Don’t Leak Money

You must first find an edge—trades that produce better-than-random results over time.

Then you must eliminate unnecessary mistakes.

Here’s how damaging those mistakes really are:

If you risk $50 to make $50 and once per week you take a trade you know you shouldn’t take—and lose $50—that’s:

• $200 per month
• $2,400 per year
• on one contract

Now scale that.

If you’re trading ten contracts and eliminate just one bad trade per week, that’s $24,000 added to your bottom line annually.

That’s optimization. If you’re up $400 on the day and take a pointless $50 loss, finishing up $350, it feels harmless. It isn’t.

The correct thought is:

“That trade was unnecessary—and over a year, trades like that cost me thousands.”

The Only Two Rules in Trading

Trade what you see. Don’t be an idiot.

Everything else flows from that.

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Risk Disclosure:

Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: 

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.

In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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