This post goes very well with a similar post I wrote on emotional intellience in investing.
If you’re a trader, I’m sure you’re all too familiar with the euphoric feeling you get when your investment rises in value — and the sinking feeling you get when it plummets. This is a universal experience.
What separates great traders from less experienced ones is how they react to these feelings, which depends on our emotional intelligence.
When I trade my swing trading strategies, I know better than most people how dangerous it can be to choose rash moves over rationality, and I’ve lost more money than I care to admit by making this mistake over and over.
I’ve found over the years that survival in the markets is the outcome of effective risk management rather than exponential returns on capital. Losing money often leads one to look in the mirror and question whether the external problems we think we have with our trading are in fact, internal problems.
My own journey to profitable swing trading has required me to look at my emotional response to risk and how I feel about losing money.
It has been a continual process of ‘feeling’ my way forward, and a good analogy is being in a sailboat that is keeling on its side.
Newer sailors may think the keel is about to snap, but more experienced sailors know this won’t happen and can find the balance between moving forward and not straining the boat. It’s a continual process of testing the boat and adjusting accordingly.
Trading is no different, and those that go through the process tend to have a high level of emotional self-awareness. I’ll outline a few of the strategies I use in this article.
Top tip: if you think this doesn’t apply to you because you’re too good a trader or you trust your instincts, you’re almost certainly wrong.
What is Emotional intelligence?
The term “emotional intelligence” is mostly used in the context of social situations or the workplace, so you might be confused to hear it applied to trading.
But emotional intelligence isn’t just about how accurately we can perceive and respond to other people — it’s also about how good we are at recognizing and responding to our emotions.
If you’re a technical definition sort of person, you’ll probably like this one from the CFA Institute researcher Peter Salovey: emotional intelligence describes our ability to notice and control our emotions when we make decisions.
Decisions like when to sell an asset or place a trade.
Don’t Rely on Your Past Success
At this point, a common objection comes from traders who are used to being successful and “winning” at life. But no amount of success in the boardroom guarantees trading success.
The skills you need to make a sale or climb the corporate ladder are very different from those that help you trade effectively. You certainly can’t “fake it until you make it” when the people you’re trying to convince are other market participants intent on taking your money.
In fact, many people who are drawn to trading have seen success in their career — yet most people lose money when they trade.
Do you think that’s a coincidence or that you’ll be the exception to the rule? Avoid learning the hard way and take it from me that you’re probably just like everyone else. And there’s absolutely nothing wrong with that.
Traders With High Versus Low Emotional Intelligence
By now, I hope I’ve convinced you that putting in some effort to improve your emotional intelligence is worth it.
But what does an investor with high or low emotional intelligence look like in practice? And most importantly, how does their profitability differ?
As I hinted at in the introduction, an investor with low emotional intelligence is more likely to do whatever their emotions tell them to do without realizing what’s happening or making a conscious decision.
This is relevant for all kinds of investors — even those who favour long-term index funds might make a rash decision when the market dips — but swing traders are perhaps the most at risk. We frequently have to think quickly to make decisions.
On the other hand, investors with high emotional intelligence are conscious of when their emotions have hijacked them. Instead of acting on whatever their feelings tell them, they’ve learned to remove themselves from the situation and assess everything more rationally.
Note that I didn’t say investors with high emotional intelligence are immune from irrational impulses or that they have better judgment about which trades to make. They simply have a greater awareness of what’s happening and use that to their advantage.
I know from my own experience, there’s a distance created between the trigger event and the emotional reactivity. When I’m really in my zone, I see events in slow motion; the trigger event, the sense that the emotion is rising inside me and then the decision to react constructively.
Circling back to the CFA Institute paper I got the definition of emotional intelligence from; the study found a strong correlation between the level of emotional intelligence and the way investors approach trading.
This isn’t just a nice theory — it’s real life.
Strategies for Increasing Your Emotional Intelligence When Trading
For all the swing trading strategies I’ve picked up over the years — and there have been a lot of them— I don’t think anything has benefited me quite as much as working on my emotional intelligence.
After all, what’s the use in using your in-depth market knowledge and technical chart reading skills if the next day you lose everything because you panicked after a market dip?
With that being said, here are some of the most useful techniques I’ve used to work on my emotional intelligence.
Examine Your Personality
I wish I could say that there was a specific method everyone could apply to their trading to increase their profitability.
But there’s no quick fix. Why? We’re all a bit different.
According to the Big Five personality theory, people have (you guessed it) five main traits:
● Openness to experience.
It shouldn’t come as a surprise that these traits affect the way we trade. Isn’t it just common sense that a more neurotic person would be more likely to panic when the market fails, while a more conscientious person would be more likely to do their due diligence and think rationally?
Again, this isn’t just a theory — research has proven that our personality (as measured by the Big Five personality test) can affect how we trade. Specifically, neurotic and open-minded individuals are most likely to trade excessively.
Whatever your personality, one of the best things you can do is know yourself. Know your triggers, your weaknesses, and (this is the hard part) how to manage them.
Practice When The Stakes are Low
If your self-awareness is relatively good, you might have already diagnosed yourself as being neurotic, conscientious, or open to experiences.
If not, the best way to find out is through experience!
And even if you think you know, it’s still best to test out how you act in practice so you can fine-tune your strategies.
The next time you trade, pay attention to your emotional reactions and note them down. Questions you might want to consider are:
● Do you have a strong urge to recuperate your losses?
● How do you feel when you win or lose money?
● Is your instinct to think deeply or act quickly?
Of course, avoid high-stakes trading when you do this — instead, make use of the simulated trades that most mainstream trading platforms offer.
Practice Meditation or Yoga
I have a daily practice of mediation. It’s the first thing I do when I wake in the morning. I’m up early before anyone else is awake, I make tea and then sit and meditate. You can do this with or without a mediation app; a good one is Waking Up run by neuroscientist and meditation guru, Sam Harries.
Depending on your schedule, you might also want to integrate a yoga practise into your day as well. There are plenty of free Youtube videos available so I won’t recommend any, but I will say that, like meditation, the gains from yoga aren’t immediate.
One needs to practice both consistently to feel the progress from them; the cumulative benefits are compounded. Once integrated into your routine, they become a fixture of your day, which you feel you’re missing when you skip a day — a bit like brushing your teeth.
Join a Tribe
Perhaps the most powerful move you can make to increase your emotional intelligence is ensuring that you’re never struggling alone. With nobody to support you or point you in the right direction, it can be challenging to hold yourself accountable.
In my case, I found Ed Seykota’s Trading Tribe to be the most useful group. The Trading Tribe framework is all about noticing what’s going on in our minds and body and getting comfortable with what you learn.
You aim to identify how you feel, figure out why you feel that way (usually childhood trauma), and express your feelings to the rest of the group.
This involves placing yourself in a position of extreme vulnerability, so it’s not easy — but when did anyone ever claim that becoming a highly profitable trader would be?
Next Step: Emotional Mastery
Look, learning emotional intelligence is a difficult journey. I’ve come a long way since my days of being a reckless trader, but managing my emotions is something I still have to be mindful of every time I trade.
Don’t expect to wake up one day with perfect emotional mastery.
But this is also why it’s such a worthwhile goal. It’s challenging and takes a lot of effort so that most people won’t bother, but those that do will have a clear advantage and a unique insight into their psyche.
Who knows, it might even come in handy in other aspects of life!
Tim Thomas has no positions in the stocks, ETFs or commodities mentioned.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Unsplash.