Saturday, January 31, 2009

The Strengths of the Emotionally Intelligent Trader

A recent review highlighted different models and definitions of emotional intelligence. Among the features associated with emotional intelligence are:

* Ability to accurately read emotion in others and respond in empathic and appropriate ways;

* Ability to effectively assimilate emotion in thought and action for coping and problem solving;

* Ability to regulate emotion, channeling it into motivation, persistence, and effective relationships.

The traits assessed by questionnaires measuring emotional intelligence are wide ranging:

* Adaptability - Flexibility and willingness to adapt to new conditions;
* Emotional Regulation - Ability to control emotions and their expression;
* Low Impulsiveness - Ability to refrain from giving into urges;
* Self Motivation - Tendency to persist in the face of adversity;
* Social Awareness - Ability to effectively network with others;
* Stress Management - Ability to withstand pressure and perform effectively;
* Empathy - Ability to take the perspective of others;
* Optimism - Tendency to look on the bright side of life;
* Happiness - Tendency toward cheerfulness and satisfaction.

These qualities pretty much read as a collection of strengths that are present among most successful traders. To be sure, there are many cognitive strengths that are necessary to trading success, including pattern recognition, memory, and speed of processing. These will not yield consistent profitability, however, if not supplemented with emotional strengths.

In a social interaction, the emotionally intelligent person picks up on subtle cues--tone of voice, body language, changes of topic--to track others and respond effectively. If we think of traders as being in relationships with markets--and if we think of market movements as reflections of buying and selling sentiment--then it's easy to see that the emotionally intelligent trader is one who is highly attuned to the emotional meanings of market communications.

When people become caught up in their own emotions, they become emotionally unintelligent. They respond to others out of their own neediness, anger, or insecurities and fail to track what is really being communicated. Similarly, traders immersed in their own needs for profits or excitement no longer focus on market communications. They make emotionally unintelligent decisions, which are generally unprofitable ones.

The start of emotionally intelligent trading is recognizing that you are in an emotional relationship with markets. If you treat the market as a valued partner, rather than as an adversary to be conquered, you'll be surprised at the subtle communications you'll be able to hear.