"Emotional Intelligence" in Trading

How many decisions do you make a day about your investments? Being a Green Faucet reader, I know you're actively involved in guiding your personal finances. You may be a person mostly interested in the markets, trusting your money to mutual funds or money managers. You may be actively managing your own investments. Or you may be a trader, involved in the financial markets as a career.

No matter what your involvement, you make decisions every day, even if the decision is to do nothing or maintain your present positions. We all like to believe our decisions are based on solid information. We read, listen to news, watch financial programs, and study the markets, charts and strategies. All of that information, along with our store of knowledge, leads us to intelligent decisions.

Our deciphering of all of that information is done on a cognitive level. Our brain takes in the data through auditory and visual processes, accesses our long-term and short-term memory, and applies our skills of reasoning to interpret the data. Then, based on our store of historical data we find correlations and draws conclusions.

 What we do next, however, after cognitively processing all the information, is based on another set of skills. These so called "soft skills" are the basis for another school of study, "Emotional Intelligence" also refereed to as "EQ" or "EI".

The definition of EQ is; "Emotional intelligence is a set of skills that influences how we perceive and express ourselves, develop and maintain relationships, cope with challenges and use emotional information in an effective and meaningful way".

Emotional Intelligence was brought to the forefront by Daniel Goleman over a decade ago, and he has since published many great books on the subject. This article is about understanding this set of skills and how we use them in decision making in the financial markets.

There are five basic competency sets of EQ skills: self perception, self expression, interpersonal, decision making, and stress management. Just looking at them, its so apparent the important rolls they play as we take on the financial markets. Within each of these sets are three or more sub skills. The following is a description of these skills, overlaid as they apply to our decision making in trading. Note: where I mention a sub- skill below, it's in "quotes" for the purpose of greater understanding.

Self perception is about accepting our own strengths and weaknesses, understanding our emotions and how they affect us, and being willing to persistently pursue our objectives. The markets constantly offer challenges to our "self regard". Each losing trade can be a trigger to negative self thoughts and loss of confidence. That can bring fear and shame and activate an internal risk manager that keeps us from engaging in the markets profitably, even though our analysis may be very correct. A very successful trader may be wrong 35% or 45% of the time.  Great traders do not personalize gains or losses and manage emotions their well, keeping them confident and engaged.

Self Expression is about how we communicate our emotions, thoughts and beliefs. When we are in denial about our emotions, it blocks our path to growth. When we understand and accept our emotions, it frees us to be "independent" and "assertive". These are skills that are imperative when engaging in the markets. Great traders know when an emotion is affecting them, process it into healthy thoughts, and move forward - appropriately executing their trading plan and methodology.

Interpersonal skills are how we develop and maintain relationships, understand and respect other people's feelings, build trust and maintain social responsibility. Trading on the floors for many years, I learned the value of building relationships; monetarily and personally. Trading in an office for many years, I learned the drawbacks of isolation. An entire separate article could be around the importance of interpersonal skills, like "empathy", for advisors, brokers and people in the retail side of the financial markets. Trust is the basis for the operation of all aspects of the financial markets. Great traders maintain there sense of well being by building mutually beneficial relationships, sharing information and giving back to society.

Decision making is about problem solving, with an understanding of how emotions impact decisions. And recognizing how emotions create a personal bias and effect objectivity. It's also about ones ability to resist impulse or a temptation to act with destructive behaviors or decisions. Active traders make hundred, maybe thousands of decisions a day. When trading decisions come through the filters of negative thinking, it clouds "reality testing", and there is often a very undesirable result. That creates a negative-feedback loop, perpetuating negative actions. So many times traders fail to act properly, compounding losses, because the do not understand how their emotions are affecting their trading decisions. Great traders maintain emotional balance, remain objective and guide their impulses to positive actions.

Stress management is the ability to adapt emotions, thoughts and behaviors when in unpredictable, unfamiliar and dynamic circumstances in lives and at work, and to cope with stressful situations. No denying, the markets constantly present us with an opportunity for us to put ourselves into a state of stress. Sadly, we often de-stress ourselves in ways that are addictive and, at times, destructive. Or we're willing to take unreasonable risks, hoping that finally getting it right will take away the pain of the situation. The answer is to work hard on self-understanding and self-acceptance, and to do the personal work that builds "emotional fitness." Great traders make healthy choices to balance stress that keep them focused, flexible and optimistic.

All of us have these soft skills at different levels. How we use them often determines the style and method of how we approach the financial markets. For example, a person that is high in "self regard" and "optimism", yet low in "flexibility", may best serve themselves by developing an aptitude for trading option strategies that don't take a lot of maneuvering and are easily manageable in very volatile markets. In contrast, a person that is high in "assertiveness" and "stress tolerance" may be well suited to trade index futures, gold or other fast-moving markets.

What Daniel Golman stresses in his book, "Emotional Intelligence", is that our level of cognitive thinking IQ is basically fixed by our teen age years. EQ, however can grow throughout our lives. That's goods news for us traders. The markets are ever changing and our long-term success comes from our ability to learn, adapt and grow. And there are ways, through self exploration and professional coaching, that we raise our self-awareness and learn the ability to appropriately boost our soft skills to improve how we engage in the markets.

So the question you may be asking is; how do I learn my levels of these skills, my strong competencies or areas of challenge, so I can trade like a master and have a balanced and happy life?

Science and computers have melded together to bring accurate assessment tools. You're probably familiar with Myers Briggs, a popular personality assessment, often used for career purposes. The emotional intelligence community also has developed several assessments.  I am certified in EQi 2.0; a 133 question online emotional intelligence assessment that is brilliantly designed and amazingly on target. If you're interested in learning more about this assessment or about EQ, you can contact me at slim@askslim.com.

Great traders are stewards of their own success, continually growing their knowledge of the financial markets and courageously pursuing a greater understanding of themselves.