Emotional Intelligence: What is It and Why It is Important for Traders
Author: Timofey Zuev
Dear Clients and Partners,
Speaking about psychological competences, important for a trader, I would first and foremost single out emotional intelligence. Under emotional intelligence, I understand the ability to distinguish and name your own and other people’s emotional states.
Why is emotional intelligence important for traders?
I suppose that many traders would like to “get rid of emotions” to avoid losses that emotions often cause. However, such ridding would make a person unable to make decisions. An ability to find your way in complicated social situations that are influenced by the “psychology of a crowd” (and a financial market is exactly such a situation) presumes not only the skill to single out patterns (graphic, statistical) from a mass of data but also to feel correctly the market sentiment. To a larger part, market sentiment is the information unavailable to algorithms (though there are attempts to create algorithms that would estimate market sentiment).
Putting things very simply, we might say that the price impulse, spurting from a range and supported by professional demand/supply, will provoke the stereotypical reaction of traders who will try to sell at “inflated” prices. As a result, the trend will further be moved mostly by the emotional reaction of short-term traders who would be closing their positions. A high level of emotional intelligence will let the trader detect such situations and react accordingly.
For sure, the main role of emotional intelligence is to detect your own emotions. If a person (trader) experiences some emotional state that they cannot recognize, this might distort the perception of the market and push out some important information. Simply speaking, the trader will start looking for reasons to make a trade (and find them). In contrast to a simple reactive action, when the trader moves the Stop Loss or “enjoys revenge” on the market, the process here is much more complicated and hard to detect. A trader with distorted perception of reality will be sure that their analysis has been objective, accounting for all necessary factors; alas, their attention will be focused very selectively.
That is why emotional intelligence is so important: it allows to realize your own emotional states in time and avoid distortions.
Main perceptual distortions in the market
- The urge to trade in an inactive market (the trader tries to enter when it would be wiser to just wait).
- The desire to go against a breakaway (escaping the range, the price will seem unlawfully “high” or “low”, so the trader will try to open a position, justifying it by “analysis”, drawing new lines and “channels”).
- Avoiding trades and risks in times of extremely low volatility (usually before a breakaway).
- Decreasing activity after a losing series.
- Increasing activity after a profitable series.
I intentionally skip such types of behavior as increasing the lot significantly to win back your losses or make a certain amount of profit. We speak just about mental distortions, not the lack of self-control. When emotions exceed the “pain threshold” and rule one’s behavior, another mechanism that we are going to touch upon comes to the scene.
Most “bad” trades appear when the trader squeezes their perception into a narrow framework and becomes blind to important events and details.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team