The recent post on "following the market like a psychologist" drew upon the analogy between tracking markets and tracking social or counseling conversations. Central to this idea is that people and markets operate in particular states. Shifts in these states are meaningful, reflecting the processing of real-time information. Reading markets is not at all unlike reading people, with all the challenges of imposing our own meanings onto conversations, overreacting to communications, and missing the essence of what is being communicated.
Social competence--or emotional intelligence--is largely a function of being able to seamlessly assimilate and respond to these state shifts. When a person lowers her voice and talks about a loss she experienced in her family, only a socially tone deaf individual would continue a prior banter. The socially competent individual picks up on both the shift in voice and the meaning of what is communicated, processes that in a personal and empathic way, and responds with concern and condolence.
Similarly, the competent trader will observe a shift in markets--a breakout from a range, a slowing down of trading--and adjust expectations and actions accordingly. The trader who enters the market with a fixed directional view and sticks with that view through minute after minute, hour after hour of contrary evidence is not unlike the bore who dominates a conversation by talking exclusively about what interests him. The emotionally intelligent person is one who talks with people, creating an intricate dance--not the person who talks at people, heedless of their reactions and communications.
Many traders don't trade with markets; they trade at them. Their failure is not simply one of communicating, but of listening. The socially skilled conversationalist does not barge into a party conversation by immediately talking. Rather, she will hold back, listen to the ongoing conversation, and then find a point to join the flow. An emotionally unintelligent trader will not first listen to markets; his job is to trade! Like a conversationalist who thinks his only job is to talk, the trader who thinks his only job is to trade will naturally operate outside of the market's rhythms. In a very real sense, he is not trading the markets, but his need to dominate markets. Little wonder such traders experience frustration when the markets don't yield to those attempts!
So often, educational efforts at trading begin with how to trade: how to recognize "setups", how to place orders, etc. That's like teaching counselors and therapists how to talk to clients before you've shown them how to listen--and what to listen for. The challenging--and fascinating--part of being a psychologist is figuring things out when you're *not* talking: letting a person's unfolding story reveal its patterns and meanings. Many an inexperienced counselor jumps the gun with advice, rather than waiting with empathic listening and figuring things out before speaking.
It sounds a bit strange, but empathic listening--the capacity to hold back, process information, not personalize it but relate to it--may well be a core competency for discretionary traders. It isn't so much emotion that derails good trading as any interference that takes us out of the flow of market conversation, leading us to react to our own impulses and feelings rather than the messages laid out in front of us.