Written by Katie Gomez

Trading isn’t just about managing money, it’s also about dealing with emotions. A day trader’s mind operates in a heightened state, specifically in terms of the emotional investment involved in their trades. Emotion makes trading more difficult, so it’s crucial to understand the psychology behind trading and how your mind can become better equipped to deal with the everyday stress of the stock market. 

Psychology can analyze the interactions of the stock market and the stock trader. The leading problem day traders struggle with is having emotional attachments to trades (i.e., low emotional intelligence). Day traders live and breathe the stock market from the moment it opens to the moment it closes (and even in the hours between). In this article, I will review the importance of emotional intelligence concerning your success as a trader and how to improve it.

What is emotional intelligence?

You may already know this term, as it has become a buzzword; however, only a few of us can describe exactly what it means and how to test or improve it. Kendra Cherry, MS., the author of the Everything Psychology Book, describes emotional intelligence or EI as “the ability to perceive, interpret, demonstrate, control, evaluate, and use our emotions to communicate with and relate to others effectively and constructively” (Cherry, 2023).

Surprisingly, researchers have found a higher correlation between successes (wealth and health) and emotional intelligence than found concerning one’s IQ. Although standard intelligence, or a high IQ, is still relevant, given the social and emotional components behind longstanding success, a higher EQ could be a more significant indicator of success. Although elements of emotional intelligence are not usually found in textbooks, they are certainly tools out there you can use to educate yourself. 

While standardized tests determine one’s IQ, emotional intelligence is tested in the real world in our relationships; how we work, react, and communicate with ourselves and others. Moreover, this test determining our EQs is ongoing; instead of utilizing deductive reasoning or reading comprehension skills, we are being tested on skills such as introspection, self-awareness, mindfulness, and empathy. 

So what does EQ have to do with stock trading?

Although it may seem like you have to have a high IQ to succeed in careers based around finances, such as day trading, EQ is a better indicator of success. Some of the best investors in history, such as Warren Buffet, relied on their emotional fortitude rather than their superior intellect (Duggan,2016). Stock trading is about impulse, feeling, and trust, all things an IQ score doesn’t measure. 

Most traders understand the importance of controlling their emotions or emotional regulation, yet many still struggle to put it into practice. Especially day traders, who sometimes spend more face time with their computer screen than other people, it can be harder to notice, let alone improve their emotional intelligence.

Is it possible to change our levels of emotional intelligence?

Luckily, no one is born with a high EQ, meaning it can be developed and improved upon over time with a combination of self-awareness, consistent practice, and self-reflection; it is not set in stone. According to Dugan 2016, there are plenty of things investors can do to improve their emotional intelligence (EI):

Machel Strahilevitz, an associate professor at Duke University Center for Advanced Hindsight, researched the role emotions play in investing and found that if investors can learn how to harness their feelings, they can easily improve their portfolio performance. Strahilevitz claims that those who know how to regulate their emotions and improve their emotional health make clearer and more logical trading decisions, thus improving their financial health (Duggan, 2016).

Just as financial health begins with emotional health, emotional health begins with attention to physical health. Factors such as sleep, exercise, eating a nutrient-dense diet, and drinking plenty of water, are highly correlated to our decisions. Think about the decisions you make when you haven’t slept or eaten; are those the best choices you’ve made? The best decisions come from a mind and body that are well taken care of. You’ll find over time that prioritizing these simple acts of self-care helps curb those reactive or impulsive behaviors we usually regret. 

Just as financial health begins with emotional health, emotional health begins with attention to physical health. Factors such as sleep, exercise, eating a nutrient-dense diet, and drinking plenty of water, are highly correlated to our decisions. Think about the decisions you make when you haven’t slept or eaten; are those the best choices you’ve made? The best decisions come from a mind and body that are well taken care of. You’ll find over time that prioritizing these simple acts of self-care helps curb those reactive or impulsive behaviors we usually regret. 

How to Become an Emotionally Intelligent Trader:

1. Write it before you do it. Before making any trade or investment, have a written plan to avoid impulsive or emotional decisions.

2. Avoid overstimulating yourself. When the brain is overstimulated, it sends the body into a state of fight or flight, making it hypersensitive to its surroundings. Turn off the news, limit the number of open tabs, and focus on one task at a time.

3. Keep a trading journal. When you begin your journey to improve EI, you’ll find it nearly impossible to catch yourself in the moment and respond accordingly. You won’t be able to change your reactions immediately, but a journal will help you look back and reflect on emotions you experienced throughout the day. Once the market closes, while your mind is still fresh, write down any emotional triggers you experienced and reflect on that list the following day.

4. Be patient and kind to yourself. Your EQ will not improve or decline overnight; it evaluates how you act consistently. 

You are already well on your way just by reading this article. While self-awareness is the first step to improving your emotional intelligence, it is crucial. Once you notice areas needing improvement, overlooking them will become more challenging. 

In conclusion, working on your emotional intelligence takes consistent effort and reflection before learning to control/regulate your reactions and emotions. However, the positive changes are worth the wait and the work. You’ll find that the emotional intelligence you practice in the market will create a positive growth ripple into other factors in your life, such as your relationships. Working on your emotional intelligence will not only help you evolve into a better trader; but a better partner, friend, parent, child, etc. 

References 

https://www.verywellmind.com/what-is-emotional-intelligence-2795423

https://money.usnews.com/investing/articles/2016-12-13/for-investors-emotional-intelligence-is-as-important-as-iq