Emotional Intelligence from Trading
This is not a post telling how to trade; but a post asserting that trading can be an excellent training tool for emotional intelligence.
They say trading is 1% analysis and 99% psychology. It is true; trading is indeed psychology. Your decisions will be influenced by your emotions. Fear blinds you from potential gains; greed blinds you from potential losses; and over-confidence, anger and disappointment blinds you from the market action.
Long before you execute a trade, fear engulfs you making you wonder whether the entry point is right despite all the indicators used. Fear continues to grip you long after executing a trade as it wrestles resistances. Seeing this and consumed by loss aversion, you may close the trade instead of making a decision based on indicators, probability and patterns. Fear is a natural tendency and an element in our most fundamental response system: the fight or flight response system. The "flight" in it, is a manifestation of fear than a manifestation of calculated and cautious move.
During great profit runs, you have the tendency to feel empowered and execute more trades. Sometimes confidence triggers this, other times greed is the motivator and most of the time over-confidence is the culprit. When you trade further because you "want" more, the "want" shuts your rationale and blinds you from the market. And when you then loose, you becomes angry or disappointed. Now, with the urge to recoup the loss, you execute more trades with more money. But because of the anger and disappointment, you will judge the market wrong and execute a wrong trade loosing more. Now you're further angry and disappointed and more determined to recover what you have lost again. The loop continues.
That's why most people fail in trading. This is why I failed in trading during my early days. Trading fundamentally comes down to two skills: emotional intelligence and technical analysis. But this post is not about teaching you how to trade or make you a better trader — there are many resources for that. Instead this post is about using trading as a tool to improve your decision making skills.
With some capital (say ₹10,000), execute multiple trades spanning a period of time and conduct a post mortem on why the decisions to enter and exit trades were made. Gradually, you would have built a pattern of whys. If the reasons are emotional in nature, you can construct a work flow or check-list to curb this influence and use it for future trades. This workflow can be sub par in the beginning, but as you continue analysing it against your trades, the workflow will improve and grow potent enough to influence your decision making.
Unfortunately, there is no workflow that works for all because workflows are circumstantial in nature and customized for whoever it is designed for. I shall soon share mine.
The decision making skills you hone can be applied to every a aspect of your life where decisions have to be made. Of course, you are going to loose money here. Consider this as the price you pay for your education that you did not receive in school: decision making under emotional pressures. Although it seems idiotic to loose money in trading, the truth is that trading is a less expensive way of learning these lessons.
You may be tempted to get this education for free by trading with the virtual money that brokers offer instead of your real money. But no emotions will take birth when you loose some meaningless numbers or gain profit that cannot be used. So to truly feel the fear, greed, anger, disappointment and other emotions while trading, your hard earned money must be at stake.