(By Option Alpha) We've all dated before, whether we're still dating or dated in college/high school. I was lucky enough to actually meet my wife in college. We had dated previously dated for three years before getting married 3 years ago now.
When it comes to investing it's really important that you actually take the time to date around. In this post I'm going to offer a guy's perspective on stock dating relating everything to women, but it works both ways.
1. Understand Your Investments Before You Commit
As investors and traders, we have an obligation to understand what the hell we're putting our money towards. It's no different than if we just randomly picked somebody on the street and decided to marry them. That wouldn't be a great idea.
We need to understand who they are, and where they come from, and what their values are. And that goes just the same for stocks as it does for women, and dating.
2. Each Stock Has A Personality Much Like Women
It's true. All women are different, and they're all the same.
The reality is that each woman has her own unique personality and each stock is going to behave very different than the overall market. Tech stocks are going to behave differently than manufacturing stocks. Each stock is going to have its own little innuendos that you need to understand before you start trading.
3. Technicals React Differently
Again it's true that the technicals are not going to show the exact same signals on every different stock. Some technicals will show readings where it's always a consistent pattern that a MACD roll over is consistent with a top, while on other stocks MACD will be relatively useless.
So you have to understand how the technicals work for each different stock that you're going to be trading.
4. Option Market Activity
Not all stocks are alike when it comes to the volume and the open interest of it's option market. Some of your higher prized names like Google, Apple, Microsoft, RIM, are naturally going to have a lot of activity in the options market.
But if you're dating another stock that is a lower-tiered competitor, it might not have the market capitalization to support a thriving options market.
5. Enjoy A Few Weeks (Not Days) Of Dating
Who said we had to rush into a commitment here? Enjoy a few weeks of looking at the charts and getting to know each stock one-on-one.
You can only tell what happened in the past, but you can't tell what happens in the future if you don't know what patterns to look for. Some stocks have very consistent patterns that they tend to form over and over again. But others are very inconsistent, and choppy. Again, get to know these stocks and date for a few weeks.
6. Keep Your List of Potential Stocks Short
Just like dating women, you can't date everyone on the block. You have to narrow your list down to those that are potentially good partners for you (i.e. good for you to invest in). Narrow your list down by any of the criteria that you want: price, market capitalization, industry, country, ETF or non-ETF.
Whatever the case is, you want to keep your list short, that way you can spend time and energy on those particular stocks. If you have a long list of 200 symbols there's no possible way that you can understand how each of those stocks will behave. It would blow your mind up. So again, keep your list short.
Ever Had A Bad One-Night Stand?
Some people may take this a little far, but that's okay. If you want to add your comments below, and tell me about all of your bad one-night stands, or what I like to call bad day trades. If you've ever had a really ugly, stinky, smelly bad day trade, let us know what happened and how you were able to correct.