The role of emotional intelligence in forex trading

 The term emotional intelligence refers to how a person is able to perceive and manage their own feelings and those of others. The term has been associated with two researchers, Peter Salvoy and John Mayer, and later popularized by Daniel Goleman in 1996. Emotional intelligence corresponds to a domain of cognitive ability that facilitates the handling of interpersonal relationships and promotes self-awareness, social awareness and empathy. On the practical side, this means that emotional intelligence has a significant impact (positive and negative) on a person's behavior. The following article discusses how emotional intelligence affects the performance of a forex trader.

Skills that make up emotional intelligence

As mentioned in the introduction, emotional intelligence consists of four main skills: self-awareness, self-management, social awareness, and relationship management.

While self-awareness and self-management reflect the individual's personal competence, social awareness and relationship management embody the extent of the individual's social competence. Self-awareness and social awareness can fall under "what a person sees," while self-management and relationship management can fall under "what a person does." Thus, it is clear and understandably clear that all four skills are intertwined and overlap in a complex way. Now let's go take a quick look at those skills before discussing their impact on forex traders in particular.

  • Self-awareness — a person's ability to understand his own personality, his feelings, as well as his desires and motives. A person with good self-awareness would know the change in feelings when there are changes in them.
  • Self-management can be defined as the ability to use self-awareness to be flexible and bring about positive changes in behavior.
  • Social awareness — the ability to understand the feelings of others and, in general, to understand what is going on around us.
  • Relationship management enables an individual to use self-awareness and then interact successfully by understanding the emotions of others.

Mind and social intelligence
Confidence and self-confidence
Self-esteem is another dimension that has been shown to be high in people with high levels of emotional intelligence. Emotional intelligence enables a person to be confident in his abilities. A forex trader who lacks confidence would be reluctant to place buy or sell orders even if the deal setup is perfect. After placing the trade order, the trader does not wait patiently for the price movement to start as he wants. Ultimately, the trader exits early and misses an opportunity to make good profits. On the other hand, a seasoned trader adjusts his stance to take profits and cut losses quickly. The maturity and confidence that a professional trader exhibits is a product of emotional intelligence.

Perseverance is yet another must-have trait in a forex trader. The forex trader should be able to justify his actions in a soft way, if necessary, compared to any other market participants. He should neither be aggressive nor overly passive in his responses. An aggressive mindset creates a bad impression on the trader, while too much lethargy and negativity make others view the trader as impotent. According to studies, emotional intelligence is primarily responsible for the assertiveness aspect of people.

Empathy indicates a person's ability to understand the feelings of others. In the case of forex trading, empathy also corresponds to a trader's ability to assess the response of other market participants to a particular economic event or data. Unless a trader is able to own the metrics of reaction expected from the majority of market participants, it will be difficult to take a proper trading position in the market. This may end up in costly errors. Emotional intelligence nurtures a trader's ability to understand market concepts and guide them to make decisions in line with the underlying direction of a financial asset.

Improving emotional intelligence
Not everyone is born with a high level of emotional intelligence. However, the good news is that neural plasticity, or the brain's ability to adapt to internal or external changes, can be used to increase an individual's emotional intelligence. When properly trained, all the neurons that link the way between the mental and emotional centers of the brain can branch up to 15,000 connections. This wonderful gift that every human possesses can be used to improve their emotional intelligence. Based on this theory, we can say that a forex trader who cultivates discipline in trading will be able to see a significant rise in the level of emotional intelligence very soon. When the level of emotional intelligence rises, all of the previously mentioned skills will be honed and refined resulting in better performance over a period of time.

Emotional intelligence plays a major role in the performance of a forex trader. The most important point to remember is that humans have the innate ability to increase their emotional intelligence level. A little effort falls on the individual to go a long way in nurturing the level of emotional intelligence. The level of emotional intelligence is quickly reflected in business performance.The emotional response to an event originates in the limbic system. The primary senses enter the brain through the spinal cord. However, before they reach the part of the brain that makes rational decisions, the signals enter the limbic system. Thus, there must be an adequate balance between the rational and emotional centers in the brain. Then the individual can have the ability to take actions and act without any dilemma. In other words, the level of emotional intelligence is determined by the amount of effective communication between the rational and emotional parts of the brain.

Basic skills based on emotional intelligence
Emotional intelligence enables a person to focus energy on a particular action, which ultimately leads to an amazing result. It is clear that emotional intelligence lays the foundation for a large number of skills, which would determine the performance of a person in any profession, including forex trading and investments. The set of skills that are nurtured by emotional intelligence and their impact on the performance of a forex trader are as follows:

anger management
Research has shown that a person who lacks emotional intelligence will not be able to control their tantrums. Ultimately, the person will be forced to make the wrong decisions. In the absence of the rationale prevails anger. An angry forex trader is predisposed to frustration and hasty trading decisions. Hasty decisions will lead to loss. And it won't end there as an angry forex trader may try to retaliate against the market, leading to more losses. Finally, his account will be in the wind. An emotionally intelligent forex trader would recognize and pinpoint what's wrong, rather than being in a fit of tantrums.

stress tolerance
When the volume of volatility within the market increases, the forex trader holding a position will inevitably be exposed to a certain level of stress determined by the size of the open position and the leverage used. Under these circumstances, emotional intelligence, would ensure that the forex trader remains undisturbed or stressed by the increase in price volatility. Studies have proven that the level of emotional intelligence plays an important role in determining a person's ability to manage stress. Thus, a forex trader with a good measure of emotional intelligence waits either to take a predetermined profit or to touch the level of the stop loss and avoid modifying the trade orders. On the other hand, a trader with little emotional intelligence will be prone to stress and then make wrong decisions, which will eventually lead to a loss.

time management
Time management is one of the important vocabulary in the life of a forex trader, and emotional intelligence enables a person to achieve this goal. The forex trader has to take the time to prepare himself for the next trading day. This preparation includes analyzing the market, determining entry and exit points, and maintaining trading diaries. Through emotional intelligence, the trader is able to identify his priorities and needs so that no trading activities are missed due to lack of time.

Flexibility is another necessity that a forex trader must have. Studies have shown that emotional intelligence affects a person's resilience in an amazing way. A solid trader will find it difficult to accept mistakes, especially if the market does not move as expected, while a flexible trader will close the position and wait for the order to become clear. On the other hand, a trader who lacks flexibility incurs losses that may threaten the entire account. Professional traders are always flexible. They realize through their experience the fact that the market has no ceiling or bottom.

the responsibility
The forex trader should be held accountable for his actions. The response can be either positive or negative. However, the trader should not be shy about being held accountable. This is the centerpiece of the leadership process in all things. Blaming the market or the broker is a peg and a common habit of some traders. While we cannot deny the fact that some unlicensed brokerage houses loot clients’ money in various ways, this does not negate that most of the brokers stick to business ethics. Thus, the trader should meditate and analyze the errors rather than trying to blame the external aspects. Emotional intelligence makes a person accountable and accountable for their actions, and any trader definitely needs to have that capacity.

social skills
Interaction and communication skills are a must to succeed in any profession and forex trading is no exception to this rule. The trader should not hesitate to contact the broker in case of any doubts about the spread, questionable price hikes, payment/deposit issues, as well as issues with the trading platform and swap rates charged, and what they may wish to communicate about. Reluctance to communicate leads to the exacerbation of problems. If a person is new to forex trading, they should have no qualms in raising doubts or exchanging ideas with experienced professionals through forums and social media platforms. Perhaps emotional intelligence helps the trader to express his opinion without any restrictions and in an eloquent manner.

decision-making ability
As discussed earlier, the primary senses enter the limbic system before they reach the specific part of the brain that makes rational decisions. Thus, any decision made by a person is the result of the cumulative influence of the rational and emotional center of the brain. If the emotional center is not performing well, the brain's response is not sufficient enough to solve the issues. Studies have proven that emotional intelligence affects a person's ability to make decisions. Perhaps it is the decision-making ability that ultimately decides the profit and loss factor of a forex trader. A trader with good emotional intelligence is able to make smart decisions at the right time.

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