Trading Math Part II – Don't Let Statistics Fool You

Risk - RewardsRisk vs. Reward

Last week I wrote an article titled Trading Math and received quite a bit of positive response from it. The article discussed the importance of keeping your losses small and letting your winners run. This week, I want to follow up with a brief introduction to risk and reward in capital markets. Put simply, every transaction on Wall Street presents a chance to both win and lose. In the simplest sense, successful traders make more money than they lose and unsuccessful traders do the opposite. The risk of the trade is the difference between your entry price and your exit price, if you are wrong. The reward of the trade is the difference between your exit and entry prices, when you exit with a profit.

How Unsuccessful Traders View Risk & Reward

Most people get caught up in the headlines and do not properly understand statistics, especially on Wall Street. For example, if someone tells you their win loss ratio is 90 to 10 (meaning they win 90% of the time and lose 10% of the time). At first blush you might consider that to be a very healthy win-loss ratio. But what if I told you that you can still lose money by winning 90% of the time and that ratio in and of itself has nothing to do with whether or not someone is a successful trader. The key is to understand Trading Math and look at the amount of money you win vs the amount of money you lose when wrong. The following exaggerated example will help illustrate this point:

Trader A: 90/10 Win rate

Trader A placed tend trades and won nine times and lost once. In this example, the trader won $1 for each winning trade (total won $9) and lost $10 when she was wrong (total lost $10). As you can see in this simple example, even though the trader had a 90% win rate, the trader still ended up losing money difference = negative $1). So clearly, the overall win-loss ratio is misleading and has nothing to do with the bottom line.  Let’s take a look at trader B

Trader B: 1/99 Win Rate

Trader B placed one hundred trades and only won one time and lost ninety-nine times. In this example, trader B lost $1 for every losing trade (total $99) and won $199 on her one winning trade. In this example, the trader ended up making money even though she lost 99% of the time!

How Successful Traders View Risk & Reward

Successful traders think in probabilities, not absolutes. They know that anything can happen on Wall Street and are prepared for any possible outcome, before they risk a penny. As we approach the end of the year (and quarter), I like to do an inventory of all my trades and study my actions, learn from my mistakes and see how I can improve my process. I also know that most (not all) successful traders have a win loss ratio of close to 40/60. Meaning they only win 40% of the time but end up making a lot of money because they cap their losses and let their winners run. I show FindLeadingStocks.com members exactly how to do this in real-time. Here’s to a VERY strong 2015!
 

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Wall Street Math: Rethink Your Numbers

Trading MathHow To Limit Your Losses

There is an old maxim on Wall Street that says successful traders limit their losses and let their winners run. Simple enough, right? But knowing how to actually do that consistently is not easy. Why? Because it is counter-intuitive in nature and goes against what comes “natural” for most people.

How Unsuccessful Traders Use Fear & Greed

As a quick refresher, the two most dominate emotions that drive markets across the globe are fear and greed. They are the one constant throughout history and will always be present in the markets for the rest of time. Remember, markets take on the personalities of their participants and the way the basic emotional triggers work is that when someone buys a stock at 30 and it goes to 33 they are fearful that they will lose their profits and quickly sell to lock in the gain. Conversely, if they buy a stock at 30 and it falls to 25 they become greedy and hope that it will go back up so they can get out and break-even. Another psychological layer comes into play at this point because for most unsuccessful people they believe that selling for a loss means they are “wrong” and that hurts their ego.

How Successful Traders Use Fear & Greed

One common trait found among successful traders is that they operate with the notion that markets are counter-intuitive in nature and learn how to consciously remove their emotions from their investment “decisions.” This process allows them to cut their losses and let their winners run.  In the above example, the successful trader will do the opposite- hold on to their winner and cut their loser quickly. The successful trader always has an exit plan before they buy a stock. This way they know (ahead of time) where they are going to get out if the market moves against them and how much they are going to lose, if wrong. They also know that profits are a function of time and that they learn how to be patient with their winners and impatient with their losers. Once you realize that taking small losses is inevitable you can plan for them and no longer take it personally when you are stopped out for a small loss. Instead, it becomes a cost to doing business.

Trading Math

Another important fact that supports this notion is the concept of simple mathematics (see table above). It is infinitely easier to recover from a small loss than it is to recover from a large loss. The numbers below do an excellent job illustrating this important and often overlooked concept.

Creat A Plan, Then Trade Your Plan

So, next time you want to buy a stock – ask yourself, where will I exit if wrong and how much am I going to lose. This simple, yet often overlooked, step will help you take small losses because once you have a plan, all you have to do is trade your plan. If you want to see how I do it, I show FindLeadingStocks.com members my process by giving them exact buy and sell signals in real-time so they always know exactly where to get in and where to get out before the market even opens. Then all they have to do is trade the plan.
 

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How To Let Your Money Work For You

How To Let Your Money Work For You

Money is a highly emotional and sensitive topic for most people. That’s why most people have a hard time consistently making money on Wall Street (primarily because they are making emotional, not rational, decisions).

Money Work For You

Two Schools Of Thought:

Work For Your Money Or Have Your Money Work For You

There are two primary schools of thought when it comes to making money: either work for your money or have your money work for you. Most people are conditioned to blindly do the former and stumble, or outright ignore, the latter. The conventional wisdom that society teaches is for you to play it “safe,” get a job, put in the time, get a paycheck, save your money, work hard and your paychecks will grow as you climb the corporate ladder. Nowhere in that narrative does it suggest you have your money work for you. Invariably, people have to “learn” this important skill and that takes time, effort, and a lot of patience to learn how to properly implement it. The good news is that anyone can learn this important skill and through time can have their money work for them.

Profits Are A Function of Time

The first, and most important, step to have your money work for you is to change the way you think about money. Instead of thinking that you have to work for your money, start believing that your money can work for you. In order to actually have your money work for you, one of the most important facts for you to realize, is that profits are a function of time (in any business, not just on Wall Street). In that vein, patience is a critical component to actually having your money work for you. Sometimes, less is more and less activity can actually be better than over trading.

Change Your Thinking & Your Habits Will Change

Because most people are not aware that they have to reprogram their thinking, they end up doing the exact opposite of what is necessary to make big money in stocks. Successful people on Wall Street (regardless of their approach) let their profits run and cut their losses. Saying this and (knowing how to overcome your emotions) actually doing it are two very different skills. Most people cut their winners short because they are fearful that their profits will disappear (thus never capturing big gains). To make matters worse, the “work for your money mentality” causes them to engage in another harmful habit by letting their losses grow (because they want to get out at “break even” or they do not want to sell and admit they are wrong). For example, if you buy a stock at $50 and it goes up to $52 or $53 in a couple of days, most people will sell it and lock in the profit (because they are fearful that their profits will evaporate). Or if they buy it at $50 and it starts falling they hold on and “hope” that it will go back up and they can get out and break even. More often than not, the exact opposite happens (the stock that goes up keeps going up after you sold for a small gain and the stock that falls, keeps going down and your losses get out of hand).  That reminds me of the old Wall Street adage; Be fearful when others are greedy and greedy when others are fearful.

Your Money Can Work For You; If You Let It

The good news is that in today’s information-age there are many resources available for you to learn how to have your money work for you. We created FindLeadingStocks.com for anyone who wants to learn how to buy and sell leading stocks. The service is designed to teach you how to fish while giving you fish along the way. Each week we share our logic, show you how we are navigating the stock market, give you new trade setups (before they breakout), and give you exact entry and exit points in leading stocks as we add them to our model portfolio in real-time. For a little over $2/day- why wouldn’t you join?

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The Last Economic Frontier 

I look at capital markets (stocks, bonds, currencies, and commodities) as the last economic frontier. For the purpose of this article, I’ll focus on Wall Street but the same concepts apply to other markets. It is the one place on earth where anyone can make (or loss) a fortune- regardless of their background, skill-set, formal education, natural physical talent, race, religion, sex, creed, or any other prohibiting factor you can think of.

You Can LEARN How To Make Money

The single best way to consistently (legally, morally, and ethically) win on Wall Street is to learn a set of skills necessary that allow you to do only one thing: Make Money. The good news is that anyone can learn these skills, providing they are willing to keep an open mind, work hard, and be flexible in their approach.

You Must Be READY to WIN:

Accomplishing this feat is simple, but not easy. It requires a great deal of hard work, dedication, tenacity, and most importantly introspection/personal growth. This heightened sense of responsibility is usually the biggest obstacle most people face. There are a myriad of reasons why people have a hard time overcoming obstacles in their life but they are outside the scope of this article. Suffice it to say, most people are not comfortable leaving their self-imposed comfort zone (most people tend to “blame” outside circumstances and as a result play the victim and not take responsibility for their life).  Becoming successful on Wall Street requires you to learn a set of skills necessary to make money but really be ready to push yourself past your comfort zone. How you think is a HUGE part of being successful in life and in the market. Take inventory of your thoughts. In order to win, it is important to think like a winner. Once you master this process you will achieve success beyond your wildest dreams.

No “Right” or “Wrong” Way:

One universal truth, in the market and in life, is that there are many ways to WIN. Unfortunately, most people fall in love with one approach and to their personal determent fail to grow because they spend all their energy bashing other approaches instead of seeking the truth. In short, you need to ask yourself what is more important, being right or making money? I hope the answer is obvious.

Your Most Important Task:

Your most important task is to make money in the market. Everything else is noise. Doing so does not happen overnight and it is much easier to learn alongside someone else than to go it alone. Find a reputable source, someone you trust, and learn from them. Another interesting universal truth, in the market and in life, is that people can look at the same facts and interpret them in many different ways. For example, the S&P 500 is trading at 1900 is that expensive or cheap? Just like beauty, value is in the eye of the beholder so your job is to find a set of rules you can follow which makes money in both bull and bear markets. Then your job is to be true to yourself and follow those rules to financial independence. Want more? Get exact buy and sell alerts on FindLeadingStocks.com
 

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Why Most People Lose Money In The Market- It’s human nature.

5 rules

 Immediate Gratification:

Profits are a function of time. By definition any trade that is exited with a profit requires a certain element of time. The problem is that most people have a natural tendency to seek immediate gratification at the expense of long term gratification. That is why most people lose money on Wall Street.
Think about a diet- why do most people struggle to lose weight? The answer is human nature. Most people do not have the willpower, or ability, to delay gratification (even if it is in their best interest).  So instead of going to the gym and experiencing short term pain, most people sit on their couch and eat chocolate (enter desert/snack of choice) and gain weight. The immediate gratification of eating chocolate is more powerful than an often immeasurable benefit of going to the gym and eating right. The same phenomenon plays out in all areas of life, especially on Wall Street.

Successful Investors Are Patient:

I see this phenomenon manifest itself everyday in the stock market. In theory, what should matter most is the absolute ROI, but unsuccessful clients are always looking for the holy grail and jump from strategy to strategy or portfolio manager to portfolio manager in search of immediate gratification. Years pass and they are always behind.
On the other hand, successful investors are patient and understand profits are a function of time. They are able to exercise patience and win in the long term. That is why I interview everyone before taking on a new client and only accept business from people who are not looking to get rich quick.

5 Steps To Becoming A Long Term Success

1. Make Rational, Not Emotional, Decisions – Do you have a plan to enter and exit your trades? Or do you just wing it? If you have a plan, write down your rules and make sure you trade your plan. If you don’t, or can’t, follow your rules, hire someone who can.
2. Respect Risk –Wall Street is not going anywhere. If you risk too much your emotions will take over and you will likely go broke. Always know where you are going to exit before you enter and how much you are going to risk if wrong.
3. Don’t judge your success one trade at a time – Losing money is part of trading. It happens to everyone. Once you learn to expect that will happen you can plan for it and get past normal pitfalls (giving up on your system after a few losing trades).
4. Think like a winner – Remember, winning starts within. How you think is everything.
5. Ask For Help- Making money on Wall Street is simple, but definitely not easy. Don’t let your ego get in your way of making money. Most people have a hard time asking for help. That’s just one reason why most people lose money on Wall Street. You don’t have to go it alone. Find someone you trust and are comfortable with and don’t be afraid to ask for help. Want more? Get exact (and early) buy and sell signals in leading stocks on  FindLeadingStocks.scom

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Market States & 5 Market Cycles

Albert

Market States & Cycles
04.29.14

The stock market is constantly changing but the one constant throughout history is (has always and will always be ) human nature. The stories, stocks, centuries, asset class, bubbles, busts, change, but people don’t. That is why it is important to understand market cycles not just from a technical level but from a psychological level as well. If you develop or use a strategy that controls your risk and is built around how markets actually work you will do well on Wall Street. The hard part for many people is having the discipline to stay true to their strategy and actually follow it in real-time.

3 Market States: Up, Down, or Sideways

People, to their detriment, have a natural tendency to over-complicate most everything in life. Especially, difficult concepts that are not easily understood (e.g. Wall Street). At the most basic level there are only three directions any market or stock can move: Up, Down, or Sideways.

5 Market Cycles

Step 1 – Base
The first step before a trend begins is to see the market (or stock) build a base (move sideways). During the basing phase, the market is moving sideways between support and resistance. During the latter part of this phase, ideally the action will tighten up (almost like a coiled spring) and then at some point breakout above resistance (creating a new uptrend) or breakdown below support (creating a new downtrend).
Step 2 – Trend Begins
Ideally one would like to see the breakout occur on heavy volume which is a strong sign that large institutions are accumulating (buying) stock. Remember, it is important to note that price is primary and everything else (including volume) is secondary. Some people say you must have volume above X% in order for a proper signal to emerge but based on my research and experience, price is primary and volume criteria is secondary.
Step 3 – Normal Pullbacks
During the trend (up or down), it is very normal to see a breakout pullback and slightly fail initially (shake out the weak hands) then blast off again. Remember the market is counter-intuitive in nature and tends to fool  most people, most of the time. The general crowd tends to miss the first few breakouts and tends to buy after the move becomes “too obvious.” The smart money does the opposite- buys early and sells into strength down the road.
Step 4 – More Basing & Too Obvious Factor
As the trend (up or down) builds- the states rotate from trending to sideways and back to trending again (several bases develop within a trend). This is normal and healthy action as the trend develops, matures and eventually ends. After the trend matures, most people who doubted the move are now buying into it (fear of missing out). Thus creating more momentum and eventually the move becomes obvious and shows up on most technical/charting blogs.
Step 5 – Trend Ends- Tops/Bottoms
Remember that all trends eventually end which means traders (not long-term investors) will need to sell their stocks at some point. After a big move, up or down, fear builds; the smart (a.k.a. early) money is getting out while the dumb (late) money is getting “in.” This creates sloppy wide-and-loose action (after a big move) and typically suggests a top or bottom is close to (or in the process of) forming.
Rinse, Wash, Repeat- New Trends Begin
Once a top is completed (sideways action after a long uptrend) support is broken of that sideways consolidation and a new downtrend begins (go back to phase 1). The same is true after a long downtrend, the market bottoms, and a new uptrend eventually forms. Keep this mind as you buy and sell stocks. Ask yourself am smart, or dumb, money? Late or Early? What state is the market in (up, down, or sideways) and what phase of the cycle are we in. Want exact buy and sell signals in leading stocks? Join FindLeadingStocks.com
 

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A Brief History of The Global Economy

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Lego
 
Has copper lost its importance? The basic premise is that for the past few years, copper and other industrial metals, no longer play a critical role for global economic growth. Don’t take my word for it; the proof is in the charts. Since 2011, copper prices have been steadily falling while US stocks have been steadily rising. In order to better understand why this is happening let’s take a quick look at the evolution and history of the global economy.
A Brief History of The Global Economy– 
I have studied every major economic cycle going back to the 3rd century. The economy has evolved tremendously over the past several hundred years.
Here is a brief look at the evolution/history of the global economy.
1. Agriculture Age:
For centuries, the global economy was almost fully dependent on agriculture. Then in the mid 1700’s things changed. Thanks in part to a concurrent/explosion in technology, communication, and transportation, the Industrial Revolution was born and changed the global economy -forever.
2. Industrial/Services Age:
The Industrial Revolution began in the late 1700’s and lasted for about a century to the mid-1800’s. The transition was a paradigm shift for the global economy. People migrated in droves to large cities and the age of mass-production was born (copper and other industrial metals played an integral part during this period because they were used to build “stuff”). The main driver for most developed economies during that time was goods and services. As each country’s economy developed it invariably moved more towards services and away from goods.
3. Information Age:
Then in the late 1900’s, another major paradigm shift occurred – Information become the primary engine of the global economy and quickly became the most valuable commodity on the planet. For the last several decades, more money has been created than the entire history of the world & most of it is based on buying/selling information/ideas (that is why copper/other industrial metals are not as important as they once were to global economic growth).
Information Is Power
I can go on and on but that is beyond the scope of this article. Suffice it to say, in today’s economy, information is power. Additionally, people, rightfully so, are willing to pay for it. In fact, my entire business (and most of the financial service sector) is based on buying and selling information. If I provide my clients with “intelligent” ideas they will be happy and stay with me for life (or until I stop providing them with good information). So each day my job is simple: Provide you with intelligent ideas in the market. I hope I did my job today. If you want powerful ideas delivered directly to your inbox, Join FindLeadingStocks.com
 

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The Brain's Currency

BRAIN

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Attention is the brain’s currency. We all have a limited amount of it (scarce resource) and we are all free to use it anyway we like. Most people don’t think about how they “use” their attention and end up spending it, instead of investing it.
Invest, Don’t Spend Your Attention.
Most people spend most of their time reliving the drama of their past or worrying about their future. Doing either of these events, takes you away from the present moment or forces you to spend your attention on something that has a very low ROI. For a better ROI, I’ve learned that if I invest my attention on the now (focus on finding new opportunities and properly managing my existing positions) I will do much better in the long run. Focusing on the now, helps me invest my attention, not spend it.  
The Only Time You Can Find New Opportunities Is…
I learned that the only time I can find new opportunities (in life or in the market) is in the now. In fact, the only time I can make any decision, large or small, is in the now. Even if I decide to do something next week, or at any other point in the future, when that time comes, I will do it in the now. What happens most of the time is that I found myself unconsciously thinking of the past or worrying about the future and that prevented me from having a “clear head” when looking for new opportunities. I read somewhere that worrying about the future is like praying for what you don’t want.  
Learn From The Past, Prepare For The Future & Focus On The Now:  
It is important to learn from the past and prepare for the future but I do my best to make sure that it doesn’t consume me and take up all of my attention- all the time. I used to spend the most of my day thinking about how I got stopped out of XYZ or missed that monster stock (or any other drama of my past), but found out that doing this would prevent me from finding new opportunities that exist right now. 
Mental Inventory: 
Now, before I start my “research” or make a decision, I do my best to focus my attention on the present moment. I do this by taking a mental inventory and make sure my head is clear before I engage in that activity- large or small. This helps me shift my thinking to the now and opens me up to finding/receiving new/big opportunities. It also helps me to invest my attention and not spend it – which yields a much higher ROI.  
 

Why your emotional intelligence will make or break your business success

The same is true for trading/investing, not just business:
Guest Post:
Jan 2014
by Peter Shallard
The entrepreneur stereotype has permanently changed.
The old school business archetype is all about smooth talking, pinstripe-suited, cigar smoking, deal brokering, power tycoons.
These captains of industry weren’t afraid to scream at subordinates, drown their sorrows in mid-afternoon whiskey or mortally wound their opponents at the negotiating table. They won huge success, fighting bitterly against all the odds.
It was always hard, never fun and once they “arrived” at success they promptly rode the gravy train all the way to the last stop: Divorce, Diabetes and eventually… Death.
It’s a dying breed. The good news? Even as these assholes fade into legend, a new paradigm of entrepreneurship has emerged.
Want to know the big difference between the new school of entrepreneurs and the old? It’s Emotional Intelligence.
The new, smart(er) entrepreneur knows that his (or her) emotional state dictates the success he creates. His mindful understanding of emotional psychology elevates him to the next level of brilliant business success and impact.
Here’s why…

Emotion drives decision 

Antonio Damasio, a professor of neurology at the University of Iowa, is a leading researcher in the neuroscience of emotion and decision making. His research shows that part of the human brain, called the amygdala, assigns emotional meaning to situations we encounter.
Damasio found startling phenomena in patients whose amygdala had been removed during brain cancer surgeries. Otherwise recovered patients would rapidly drive their business and personal lives into the ground by a series of rapidly made, terrible decisions. 
One famous patient in Damasio’s studies, whose identity was protected with the pseudonym “Elliot”, showed the full impact of losing the neurological hardware responsible for emotional intelligence.
In a few short months, Elliot went from being a recognized and successful business person – with a stable and happy personal life – to divorced, re-married and divorced again. Meanwhile his financial performance declined so rapidly he lost his job.
It turns out the amygdala’s function is to make us act on our emotions – using “gut feeling” to make day to day behavioral choices. It forms rapid emotional associations with external stimulus – the stuff we experience as we’re walking around living life – taking a whole bunch of decision making and “behavior choosing” off the plate of our conscious mind.

Your number one decision making tool is an auto-pilot system powered by emotion

In healthy people (with functioning amygdalae) the idea is that your emotions – negative ones in particular – serve as a powerful early warning, radar detection system.
We feel twinges in our “gut” about upcoming situations as we anticipate them and the amygdala translates that feedback into tiny tweaks in our behavior. A classic entrepreneurial example is seen anytime you negotiate a deal: You’re constantly unconsciously assessing and tweaking your communication, based on what you observe… and what your gut tells you about that.
This isn’t just happening at the negotiating table – your emotional state is dramatically effecting all your behavior. In business and at home.
When you feel a certain way, you’re marinating your brain in a specific bath of neurological chemicals. That in turn dictates the focus of your cognitive powers – literally shutting down behavioral options and opening up ones that never previously existed in your perception.
Think of the last time you were angry. Or better, really furious.
Remember how, back then, when you were in the heat of the moment no other behavior seemed to make sense as an option besides continuing to let the fury flow?
Anger, as an emotion, has this weird habit of shutting down the doors of perception. It eliminates our choices and forces us to continue committing further to one treacherous course of action.
Or, think of the last time you were really sad. Depressingly so. Remember how you felt likeeverything was hopeless and you had nothing to be grateful for. Did you feel like you had an abundance of behavioral choices at the time?
Painful sadness and hurt does the same thing. It robs us of options and blinds us to find the (obviously still present) positive things in our lives. It destroys our perspective.

Emotion effects all of our decision making, even when we tell ourselves we’re being rational

People who allow themselves to dwell deep amongst their emotional baggage are constantly throwing off their emotional decision making ability. The neurological function that makes “gut” choices starts producing skewed results.
Which brings us back to the old school cigar toting tycoon. The classic Trump-esque power suit entrepreneur is constantly allowing their decision making to be swayed by a powerful neurological bath of chemical bias.
The enlightened entrepreneurs produce more success (and fulfillment) by using emotional intelligence to guide their decisions.
Using emotional intelligence means working rapidly to identify and work through any negative emotion as it presents itself.
Before the emotion gains a food hold as baggage, you’re using it – in real time – as highly tuned feedback to tweak the direction your behavior. You’re flexible, agile and adaptable. Meanwhile, the old school ignore their feelings until they’ve reached boiling point. Only then will they change something, and it’s often “too little, too late”.
Convinced you want to join the new school of emotionally intelligence entrepreneurs? Here’s how to get started…

Pay attention to the way that you feel, before the feeling becomes a problem

The first step is to identify emotions as they come up. There’s no real strategy around this beyond “mindfulness” but it’s not as hard as you might think.
Humans were actually designed to feel and act on their negative emotions. 
It’s only the hangover legacy of Greek philosophy – the separation of body and mind – that gives the western world it’s peculiar aversion to negative feelings.
Negative emotions were originally designed to be experienced as a very sophisticated form of radar – advanced warning that something is coming up that we need to act on. I often talk about fear keeping us safe in the jungle – from tigers and whatnot – but all the other negative emotions have powerful, helpful meaning too.
So get a little warm and fuzzy with yourself and don’t be afraid to check in and see how you’re feeling. Any exercise of the mind/body variety will help you get good at this – yoga and meditation are king, but a moment of reflection or casual journalling will do the trick in a pinch.
This is just the first step in a series of emotional intelligence exercises I train almost all my clients in. I may write a follow up to this article, breaking down the rest in detail… but in the meantime, let me know how you access your emotional intelligence.
There are countless tactics humans can use to get in touch with (and use!) their feelings – so let’s get smarter together by sharing in the comment section. And if you want to know more about my process, drop  a quick comment to let me know that I should write about it next week!
 

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Source: http://www.petershallard.com/why-your-emotional-intelligence-will-make-or-break-your-business-success/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+PeterShallard+%28Peter+Shallard%29