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Emotional Intelligence v Intellectual Intelligence in trading.

  
  Education
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What is more important for success as a trader – A high level of Intellectual Intelligence, or a high level of Emotional Intelligence?

Warren Buffett once said; “Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing“.

 Very briefly emotional intelligence can be defined as an ability, skill or a self-perceived ability to identify, assess, and control the emotions of oneself, of others, and of groups. 

 Broadly speaking intellectual intelligence can be defined an academic or cognitive intelligence. Resing and Drenth (2007) use the following definition: “The whole of cognitive or intellectual abilities required to obtain knowledge, and to use that knowledge in a good way to solve problems that have a well described goal and structure.”

What Greed and Fear do ?

  
  Education
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 What greed and fear do:

  • Not setting a stop when the method requires placing a stop (fear of taking a loss).
  • Moving a stop when it shouldn’t have been moved (fear of taking a loss).
  • Removing a stop when it was already in place (fear of taking a loss).
  • Taking profits too early when the signal to exit has not been given (fear of profits being taken).
  • Taking profits too late when the signal is already given (greed).
  • Chasing the market when the entry is already past or no signal was given (greed of missing profits).
  • Not making the entry when the signal is given (fear of losing again).
  • Buying the pullback that is no longer a pullback but a decline (greed based on judgment that it’s now cheaper) or short selling when the rally is now a continued primary direction (fear of losing).
  • Adding on a losing position, i.e. averaging down (fear of losing).

How does a trader go about trading without fear or greed? Although no one can really trade without them, the emotion will still be there, especially when the position is still on. However he can keep them under control by not acting on them.

                                            There are few solutions to this problem:

  1. Write a trading plan for each and every trade and referring to it when he feels the emotion is overtaking him.
  2. Keep a trading journal with each trade taken along with thoughts and emotions during the open position. Recording these moments will reveal how much or how little control he has over emotions that influence or interfering with his trading method.
  3. Use an automated trading system to avoid interacting and interfering with trading. When no trading decisions have to be taken, there is less of a tendency to interfere.
  4. Once the trade is taken and stops and targets are set, walk away from the trading station or go about with other tasks. Stay close and follow every up and down ticks will increase emotions and will eventually affect trading.
  5. Keep the Profits and Loss (P/L) columns out of the desktop. This is the most important factor of all emotions: counting money. By having it readily available emotion will be exaggerated swinging up and down according the profits or losses going up or down. Removing this information is especially recommended for day traders.
  6. Trade small size until emotions are under control. By doing this, it’s obvious that it’s not about making money but about trading the method properly. The further away the thought of money is, the better the emotions are kept at bay.
  7. If trading is technically-based, focus on the charts, not on the quotes windows. Scalpers spend so little time in a position that using quotes and ticks are a necessity. For other traders, these can only increase emotional states.

TRADING ERRORS

  
  Education
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1.  Refusing to define a loss.

2.  Not getting rid of a losing trade when it is obviously a loser.

3.  Getting locked into a bullheaded opinion about market direction.

4.  Focusing on monetary value of trade instead of market structure.

5.  Revenge trading to recoup a loss.

6.  Not reversing a position when the market is clearly changing direction.

7.  Not following the rules of your strategy.

8.  Planning for a trade and then not taking it.

9.  Not acting on your intuition.

10.  Giving back recent gains due to overtrading or inconsistency.

We can learn a lot from the market, and from ourselves, if we would only listen.

Roubini: How to prevent a depression

  
Analysis, Education
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An eight point plan to minimise the fallout of another economic contraction.

AMSTERDAM – The latest economic data suggests that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Brothers in 2008. The risks of an economic and financial crisis even worse than the previous one – now involving not just the private sector, but also near-insolvent sovereigns – are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown?

First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the eurozone’s periphery are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the eurozone, and Japan. Infrastructure banks that finance needed public infrastructure should be created as well.

Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures. (more…)

What is Finance’s Most Important Unsolved Problem?

  
Analysis, Education

I have been thinking about that a lot lately as it applies to finance.

I came up with a short list:

• Complexity, confusion, and complications — none o which are necessary

• Behavioral problems caused by human nature;

• Compressing costs — an industry problem, but clients love it;

•Short memories

• Reduced headcount as technology makes some labor superfluous;

• Gender diversity matters to some people but not all;

• Misaligned incentives?

• Excessive regulation

• Having to put the clients interest first (oh my)

What do you think are Finance’s most important unsolved problem?

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