What is Emotional Intelligence?
Emotional intelligence is a measurable construct that provides insight into whether we act intelligently in an emotional context or not. An example could be a footballer who doubts a supposed wrong decision to such an extent that he risks receiving another penalty and thereby a yellow-red card. Let's objectively consider this situation: how likely is it that a decision made during the game will be changed by the referee? How intelligent is the player's behavior in this situation, who cannot change the decision, and who risks a red card for his emotional outburst?
It becomes even more interesting in trading: the position is moving towards the point previously analyzed, where we want to close our position according to the trading plan. The probability that it will go significantly higher in this situation is very low. Now we sit in front of the screen and suddenly emotions come into play: "Oh, I'll hold the position, the market is so strong, there are another 100 pips in it." We act emotionally and, in this context, not intelligently. Everyone knows the end: either we close the trade at the position's entry, or we have to accept a loss. How can we use scientific knowledge to trade better?
Trading Better - The Most Important Points at a Glance
Emotional intelligence can be demonstrably increased through specific training (also demonstrated in my master's thesis). Therefore, in science, the term "emotional competence" is increasingly chosen instead of emotional intelligence ("intelligence is given" versus "competence can be learned"). Emotional intelligence (or emotional competence) includes the following five areas and can be transferred to ourselves and other people (for example, to understand our own or others' emotions):
- Identification of emotions: Can I correctly identify my emotions or those of others (for example, interpret facial expressions well)?
- Expression of emotions: Can I express my emotions correctly? Example: Do I show my sadness when I am sad?
- Understanding of emotions: Why do I feel this way now? What is happening to me? Example: A financial loss is processed in the same brain region where the fear of death arises.
- Regulation of emotions: Let profits run, limit losses
- Use of emotions: Can I use experienced emotions to my advantage? Example: Visualizing negative events leads to their avoidance.
In Which Areas Does Emotional Intelligence Play a Role?
After gaining a first impression of the levels at which we can evaluate intelligent behavior in the context of emotions, we want to take a closer look at the influences of emotional intelligence in everyday life as well as in trading. We can summarize three major areas in which emotional intelligence has influences on our lives: health, social behavior, and performance.
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Health: Numerous studies have shown that increased emotional intelligence is associated with healthier behavior. Such people eat more consciously, more frequently abstain from alcohol, are physically more active, have a lower risk of burnout, and are much more resistant to stress, which is clearly demonstrable through hormone tests in the blood.
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Social behavior: In this context, various studies have also shown positive and clear correlations. People with increased emotional intelligence have greater empathy and stronger self-control in consideration of social norms. Cooperation with other people is also rated higher and better utilized, which is also in line with better communication skills.
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Performance: This is particularly interesting for us traders. Successful people in sports, trading, and demanding professions have increased emotional intelligence. This can be attributed, among other things, to successful management of stress, improved group processes, leadership qualities, decision-making, and greater independent motivation.
Evaluation of the results from the underlying scientific work
Increasing Emotional Intelligence = Better Trading
Now let's get to the really exciting part of this article. We want to trade better! At this point, we should understand that emotional intelligence influences our success in all areas of life. So to become the best version of ourselves in trading, we aim to do much more than just improve our strategy. We need to improve ourselves daily. In this regard, the author has developed specific exercises for traders based on the five components outlined, which can lead to an increase in emotional intelligence (see table).
Exercise suggestions:
- Take 15 minutes each week to record emotional events
- Introduce a psychological journal:
- Column 1: Trigger (such as market news)
- Column 2: Behavior caused by Column 1 (emotional purchase at a high)
- Column 3: Note the consequence of the behavior (for example, minus 500 euros)
- Consciously speak out, monitor, and rephrase self-talk (set up a video camera during the trading session and evaluate it afterward. How do we talk to ourselves? "That was just stupid" or "Next time I have to do this when that happens"), promote constructive self-talk.
- Practice basic emotions according to Ekman in front of a mirror: anger, sadness, disgust, fear, contempt, surprise, and joy. How does it feel? Can I show all my emotions?
- Take selfies: identify what the own image expresses about emotions (variation of basic emotions; the goal is to identify one's own emotions based on the selfie)
- Practice mindfulness: for example, through meditations and daily breathing exercises before trading begins - Headspace is a good option for this
- Visualize the trading day before each session: What did the preparation look like? How was risk managed? How were losses handled?
Summary
Starting from a brief overview of what emotional intelligence actually is, we have learned about the elementary influence that dealing with our emotions has on our lives. Numerous scientific findings have been presented that show the positive correlation between emotional intelligence and different areas. So that we can become better traders every day, we should make use of this knowledge and train these skills in addition to actual trading. Trading is much more than just a strategy. We can always get better - trade better - and should therefore always ask ourselves what our strengths are and how we can use them even more effectively. The emotional component is one of the biggest levers for almost all traders.