How to pick a trade…. analysed like dating!
This is something I put together for our stock market clients with regards to selecting the best stocks to trade. It’s pretty specific with regards to the strategy that they have learnt but also thought that if you have an interest in learning to trading the stock market this may give you some further food for thought.
The primary aim of this article for you is to make you laugh and there are NO recommendations on here whatsoever.
We have had some GREAT feedback from last nights call and loads of you are really getting to grips with this.
One question that has come up since last night, with the new video regarding shorting that has been released and my discussions on how to hedge your trades and not get over-exposed to the market movements in any one direction was “How do you select the stocks to Trade”?
We went through 36 Stocks last night and I made mention of having a maximum of 5 stocks to trade for beginners but then also said that if you are going to hedge and use short vs long trades then I always look to take a similar number, if not the same number of short trades v long trades.
Now remember this, “Trading is just like Dating”. IE, if you go after everything that is available then you are going to seem desperate and will be largely unsuccessful in your quest to be happy (and your friends will probably laugh at you too!). In trading, just as in dating, we want to select “ONLY THE BEST” to spend our time and attention with.
So, as you would have a certain criteria to assess who would be a good date for you, I am going to give you 5 criteria to assess what are going to be good stocks for you to trade – and remember folks, be picky. You deserve only the best!
Criteria 1: Does the trade pertain to our rules?
Does the stock that we are looking at, pertain and match our rules that are outlined in the videos. This is a key fundamental in selecting a stock and is the dating equivalent of “Not wanting to go out with someone who doesn’t speak the same language as you”. If it doesn’t match your rules – don’t even consider it.
Criteria 2: Is the trade going with the trend?
This obviously only pertains to vertical rolling stock. If you are not familiar with this yet then please cast it aside but you will become familiar with it at a later date.
This, in dating terms, is the same as going out with someone who has TERRIBLE interpersonal skills, bad table habits, incredibly boring and is highly untrustworthy. You would possibly do it once, but never again
Criteria 3: Does the trade have at least a 3:1 Risk Reward ratio?
This is something that can really change your life. If you are only having a win / loss ratio of 50/50 but you make 3 or 4 every time you win and lose 1 every time you lose then you are still going to come out of the month with a positive nett gain.
The dating equivalent of this is going out with someone who is highly ambitious and wealthy over someone who sits at home, doesn’t have any life aspirations and watches daytime TV. Or, to put it into a real life connotation, as a friend of mine’s mother said to her : “Bel, it’s as easy to fall in love with a rich man as it is to fall in love with a poor man but your father won’t bless the marriage unless your groom is a rich man!”
Criteria 4: The stock price is over $10 per share
This criteria is normally going to ensure that there is going to be enough demand and supply of this stock for you to be able to buy and sell at the price you want to get in or out at. If you’re trading penny shares, you may want to get out of your 50p share at 50p but the market maker can only get you out at 35p. Not a tragedy if you only hold 1 share but if you have bought 100 000, then its no fun.
The dating equivalent is “does your date still live with their parents?” Pretty acceptable if they (and you!) are 16 but if they are 55, you may find it a turn off.
Criteria 5: The Volume is over 200 000
This is the last criteria on the totem-pole. The reason I have identified this is due to liquidity issues. Similar to the above, we want to ensure that there are a good number of stocks being bought and sold so that we can get in and out of the trade without too much hassle.
For those of you who are spreadbetting, I will trade anything that is spreadbettable through my broker. If the stock has only got 50 000 on the volume but matches all the other criteria perfectly with a beautiful risk reward ratio then I would have no problem taking the trade.
In dating terms, I would put this down as you being a vegetarian and your date being someone who likes a steak from time to time. No problem what so ever but if you have two potential dates who were EXACTLY the same and one liked a steak and one was a vegetarian, you would go out with the one who shared the same views as you.
I hope that makes sense on the best way to select the best trades out there folks. I hope its evident that these criteria are based in order of importance and priority. I hope that the dating analysis makes it true to life and easier to understand.
P.S. FEEL free to “Like” and leave a comment below – many thanks! 😉
P.P.S. So think of your next trade like you think of your next date. 😉