The Paramouncy Principle
Emotional Intelligence and the Trader
Why is it that 90 percent of traders who trade the markets fulltime fail to earn an adequate return even when using systems claiming 70 percent accuracy? Perhaps it is because traders do not recognize the importance of the Paramouncy Principle.
The Paramouncy Principle suggests that you are the most important variable in the trading equation. Not you, the dispassionate arbiter of technical and fundamental analysis, but also you, the thinking, feeling, sentient being with all your human foibles, hopes and aspirations. Most traders lose money because they do not have an understanding of the markets or of themselves.
They trade without method, strategy or discipline. They fall prey to powerful emotion that leads to impulsivity and behaviors more akin to gambling than to genuine understanding. They give in to perceptual biases that lead to false conclusions and inappropriate actions.
Most Traders Focus on Method
A wide educational curriculum is crucial in addressing the Paramouncy Principle, yet most traders prefer courses on technical analysis that concentrate on method but neglect money management and mental processes. A quick perusal of the popular courses available confirms this view.
The predilection by traders for learning technical or fundamental market analyses at the expense of other important areas is not new. During the early 1900s, Jesse Livermore – the legendary character in Reminiscences of a Stock Operator by Edwin Lefvre – realized that his peers overrated the value of charting (See P61). Even great technicians like W.D. Gann and Richard D. Wyckoff are advocates for the development of method, the application of discipline and the importance of money management. Yet even armed with this understanding, traders have the daunting task of identifying the psychological factors that lead to self-defeating behaviors.
Emotional Intelligence – More Psychobabble from Psychologists?
For some, the importance of emotional intelligence to the development of investment skills is considered irrelevant. Yet those are precisely the personal attributes outlined in Figure 1 that will sustain, inspire and motivate the trader during times of duress. Emotional intelligence is as important to the trader as is traditional IQ. Those who think back to their school days will recollect that there were a number of students who always seemed to get As and Bs and probably just as many who got poor grades or failed. However, we also all probably know that many of these so-called “less intelligent” students now have very successful businesses or have received public acknowledgement for their contributions to the community or society. They may have more affluence in its widest sense and in terms of personal happiness than those so called more intelligent students. The reason for these anomalies is because academics, teachers and research psychologists have ignored the value of emotional intelligence until recent years.
There are many domains and related competencies subsumed under the title of emotional intelligence, and a number of personal qualities relevant to traders are:
- The ability to control impulses;
- The ability to delay gratification;
- The ability to motivate oneself;
- The ability to persist in the face of frustration;
- The ability to regulate moods;
- The ability to keep worry and fear from thwarting the decision process during times of duress;
- The ability to empathize with others; and
- The ability to not lose hope and to communicate hope to others.
By permission of Dan Goleman