Building Investor Emotional Intelligence

If emotions are important in understanding price action, then emotional intelligence becomes a requirement of technical analysis. In other words, what does an investor or trader have to know to detect emotion in the market effectively, and how can one derive this knowledge?

There are several categories of investor emotional intelligence:

V Ability to detect emotion in market patterns

V Ability to detect transitions in the emotional state of the market

V Ability to understand what emotions convey about fundamental and technical relationships

A premise of this book is that an added benefit of alternative charting is that it gives an edge to the trader in detecting emotional phases in the market. When we view charts in this context, each chart type provides different abilities to extract or detect which emotion dominated the price action. The candlestick chart (Figure 1.1) provides a snapshot of bullish versus bearish sentiment. A white candle shows that the bullish sentiment prevailed, and a black candle showed that bearish emotions dominated. The line chart presents boundaries of resistance and support. Price action that comes close to the line, probes it, or breaks it reveals a state of change in the emotional stage of the market. Price break charts provide unique insight on the temperament of the market; because price breaks display only a break or reversal of a trend, they are key indicators of a shift in the emotional stage of the market. One may see point and figure charts, which generate columns of Xs and 0s, as measures of emotional continuity—almost as intergroup coherence emotions. Kagi charts pinpoint turning points when yin turns to yang, or vice versa. These turning points can be viewed as points of emotional turbulence or anxiety. In this context, we can look to various charting techniques as important tools, not only for improving trading performance, but also for building emotional intelligence.

We can now begin a detailed exploration of alternative charting types and their applications.

08/26/2001 09/09 09/23 10/07 10/21 11/04 11/18 12/02 12/16 12/30

Figure 1.1 Emotional patterns and markets in the USDCHF currency during the 9/11 period

Source: Chart copyright www.ProRealTime.com

08/26/2001 09/09 09/23 10/07 10/21 11/04 11/18 12/02 12/16 12/30

Figure 1.1 Emotional patterns and markets in the USDCHF currency during the 9/11 period

Source: Chart copyright www.ProRealTime.com

Chapter Notes

1. Andrew Adamatzky, Dynamics of Crowd-Minds: Patterns of Irrationality in Emotions, Beliefs, and Actions, Bristol, UK: University of the West of England.

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