Lessons from the Pros

Specialty Skills

Emotional Intelligence and What It Means to your Trading

Most people would agree that to have a substantial IQ (intelligence quotient) is very helpful to your success…in anything. It usually means that if you have a high IQ, you are in a position to solve problems, create novel or innovative approaches to issues and think critically. But, it is important to note that a high IQ alone does not necessarily guarantee that you’ll solve your problems or that you’ll be creative. This leads us to another point that was made by Howard Gardner, Hobbs Professor of Cognition and Education, Harvard Graduate School of Education; that actually there are at least eight types of intelligences that point to an individual’s overall effectiveness. These eight intelligences are language, music, spacial, math, interpersonal, intrapersonal, body, and existential. The term emotional intelligence was bandied about as early as 1987 by a number of researchers and theorists but it gained its largest notoriety when Daniel Goleman wrote a best seller entitled “Emotional Intelligence – Why It Matters More than IQ” (1995).

Free WorkshopSo, what exactly is emotional intelligence? It is simply the identification, tracking and management of your emotions. And, Daniel Goleman was right, it is more important than your IQ because what you do is inexorably connected to how you feel. In other words, emotions are organizing principles of our human system and they cannot be separated from us. In fact, they are, to a large degree, what makes us human. As organizing principles, emotions determine our decision making process and, to a large degree, how and what we think. Let’s say that you have placed an order to go long as the price action reversed at a significant fresh demand zone and you simultaneously placed a stop several ticks below the lower line of that level; then, a few minutes after the order was filled, the price action began to drop towards your stop. As you watch this taking place in the chart you might feel a tinge of fear based upon an unconscious belief that you must be right and cannot be wrong because this would mean that you are a poor trader; and that would mean that you’re going to eventually lose all of your account. Now, these thoughts are often completely out of your awareness but they initiate an emotional response…fear. As the price action gets closer to your stop the fear intensifies and prompts more thoughts; for instance, the thought that you must do something to remove the threat of loss and that would be to either move the stop or take it out completely. At this juncture or fork-in-the-road you must make a decision to either go to the left, violate your rule, violate your commitment and increasing your risk and placing your capital in peril. Or, you will choose to go to the right, manage your fear and maintain your highest and best trader at the platform and sustain your risk at the original calculated position. The choice to move the stop is caused by an emotion, but the thought that, “I’ll put myself in a better position to avoid the loss by moving the stop,” is assumed to be logical at the time. Almost every decision that we make is driven by how we feel, not by logic. At that fork-in-the-road when you must choose to either give in to the emotion, in this case fear, or do something to maintain your A-Game at the platform you are managing your emotional state. Managing your internal state is the use of emotional intelligence.

Managing your internal state is not easy. It takes mental training and a deep desire to change your process ( ineffective strategies for thinking, feeling and doing). Although emotions can create thoughts, all emotions at their inception are outgrowths of an underlying and often unconscious thought process. The brain has evolved over several hundred thousand years and automatically reacts when the system is threatened or there is a perception of threat. Perception is a “cognitive” process, meaning that when you perceive something it is part of a thought progression. For instance, if you were to come across a mountain lion as you were hiking the impulse would be to run, fight or freeze. The impulse is automatic and is first initiated by the perception of the lion and the unconscious thought that the system is in great danger and could possibly be killed. This perception (thought) happens in a millisecond and the hypothalamus in the limbic system of the brain sends electro-magnetic and electro-chemical signals to the pituitary which then secretes the hormone ACTH which floods the system and causes cortisol (the stress hormone) to be released along with adrenaline and the entire system ramps up. This physiological response is interpreted as intense fear. All these changes, along with a cascade of additional physiological responses throughout the body (blood flow, heart rate, lungs, ears and eyes to name a few), happen in just a few seconds. This is why traders feel that they are hijacked by emotions and can’t do anything about it.

Physiological and neurobiological responses (reactions) such as those in the above are hold-overs from our earliest days as cave dwellers and have evolved to help us to survive. And, when you are watching the price-action inch toward your stop the underlying thought, which often embodies as well a programmed childhood belief about yourself as not good enough or undeserving, gets activated; the system perceives danger and begins to react automatically. It is at this point, the fork-in-the-road, that you must learn to identify the emerging ineffective pattern of thinking, feeling and doing and, through using special tools intended to support your ability to remain in the now of the trade, you must learn to interrupt this pattern and choose a response that represents your A-Game. This process is akin to physical training. You wouldn’t expect to do a few hours or days of push-ups or running and be in optimal shape to compete. And, you can’t expect to fully train your mental muscles right away. It takes desire, determination, energy, time investment and courage to confront your improvables head-on and honestly. This is emotional intelligence. You must create consistency in addressing your internal issues with as much or more diligence as you do with documenting your mechanical data in order to develop the capacity for emotional strength and endurance in the trade.

Your best, both mental and emotional strategies, are required when you are in the trader trenches. Learn the mental and emotional tools that we teach in “Mastering the Mental Game” on-location and online courses that are constructed to support you in becoming deliberate in your process so that you can design your internal states and, thereby, trade by design and not by default. Also, get my book “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading,

Dr. Woody Johnson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.