Thursday, September 22, 2016

Emotional Creativity: A New Theory of Trading Success

As Averill notes above, there are two views on emotions.  One, the most common, asserts that emotions are givens:  biologically wired.  A second view is that we can cultivate what we feel and how we express it.  That second view suggests that creativity is possible in our emotional responding as well as in our thought processes.  This emotional creativity is what enables people to adapt to situations and respond to them in novel and effective ways.
Averill's work suggests that emotional creativity has three components:

*  Preparedness - The ability to learn from the emotional experience of self and others;
*  Novelty - The ability to experience and express unusual emotions;
*  Effectiveness - The ability to express emotions honestly and constructively

Research suggests that emotional creativity is different from emotional intelligence.  Emotionally intelligent people--those who can read and respond well to the emotional experience of others--are not necessarily emotionally creative people.  The emotionally creative person responds uniquely to situations, enabling them to deal with those situations in fresh ways.

Four competencies are essential to trading:

*  Cognitive intelligence - The ability to process and understand market-related information and use research, analysis, and pattern recognition to identify trading opportunities;
*  Emotional intelligence - The ability to read the intentions of other market participants and use their sentiment and positioning as inputs to one's own decision-making;
*  Cognitive creativity - The ability to put market information together in unique ways and detect opportunities that others miss;
*  Emotional creativity - The ability to respond uniquely and effectively to market-relevant events.

I would argue that most traders have a reasonable degree of cognitive and emotional intelligence.  Their success or failure is more a function of the presence or absence of creativity.  Unsuccessful traders generate consensus ideas and respond to markets in line with "the herd".  The successful trader experiences the flow of market information uniquely, and that emotional creativity enables her or him to generate novel trading ideas.

This is a unique theory of trading success.  If it is correct, much of training in trading and much of coaching has been focusing on the wrong things.  Creativity can be cultivated.  Perhaps a key to trading success is not controlling one's emotions, but learning to view and respond to the financial world in novel ways.

Further Reading:  Cultivating Emotional Creativity