Trading With The Trends In The Foreign Exchange Market
By Ultimate Trading
News & Sympathy Plays In The Foreign Exchange Market
News, good or bad, trumps all other market trends. Good news about a
company, or about another company in the same sector if the sector
is a hot one, can trigger sharp rises in the
exchange market prices. The key to taking advantage of price
runs started by news is to get in early, before everyone else has.
Obviously, if you're the last one in, you'll buy at the highest
price and then watch the foreign exchange market price go down.
Likewise, bad news can send the foreign exchange market price
plummeting. And, like everything else in the foreign exchange
market, what matters is not whether the news is really good or bad,
but what the foreign exchange market perceives it to be. You might
not think the market's reaction to a piece of news makes any sense,
but should not affect your trading. Always go with the foreign
exchange market. Remember, news overrides all other trends.
Let's say you're holding a company heading into its upcoming split.
The stock is in a hot sector, and its a one to four split. The
stock is rising nicely, and the ex-date is three days away. The next
morning, you see unexpected news that business in the companys
sector has dropped off sharply in the last quarter and that this
slowdown is projected to continue for at least the next six months.
What's going to happen to the split run? This news will take
precedence over the split trend.
Unless the foreign exchange market decides it doesn't care about
this news, which is not likely, the companys run is over. You will
have to get out of the stock. When important news comes out, all
successful traders abandon trades based on other trends. Unexpected
news is one of the main reasons why you must set stops on every
trade to protect your capital. In the same way, if you've sold short
to ride a
exchange market trend in which stocks usually go down,
significant good news about the stock should send it back up.
Now that we're on the subject of news, let's look at a related
foreign exchange market trend: sympathy plays. When a stock in a hot
sector has good news and begins to move up, the stocks of the other
companies in the same sector will often start to run up as well - in
sympathy with the original mover. Likewise, when a stock has bad
news and begins to fall, others in the sector will often start to
trend down as well. It may seem strange, but there is a reason for
the foreign exchange market to act that way.
You would think that good news for one company would be bad news for
its competitors and would logically drive their prices down instead
of up. This isnt how the foreign exchange market works. As long as
the news reflects well on the prospects of the industry or business
the news-making company is in, it will generate a sense of
possibility in the minds of foreign exchange market traders. If one
company in the sector is doing well, it's possible that demand for
the whole sector's business is growing or that the whole sector will
develop its products or market so that all the companies in the
sector will do well. It's possible, isn't it? The sector now has
potential. And that's all the market needs to hear.
A great way to evaluate sympathy plays is to look at all the stocks
in the sector to see whether others have started running with the
newsmaker. If so, look for stocks that havent moved as much, for
stocks that should also start running but haven't yet. By buying
slower movers, you'll get in at a good price and the stock will have
most of its run left. But make sure there's no other factor keeping
that particular stock from rising, such as bad news of its own that
will keep it from following the sympathy trend.
Remember, news overrides other trends. Sectors go through hot and
cold phases. Knowing which sectors are hot is especially useful in
an uncertain foreign exchange market. Whenever there's a sudden
general foreign exchange market rally, only the stocks in the
hottest sectors will participate in the rally. Stocks in cold or
dying sectors will remain flat or neutral.
Always be aware of which sectors are hot or "in play" so that you're
ready to trade into the right stocks when the foreign exchange
market rallies. At the same time, be aware of which stocks are
overvalued so that you'll know what to sell short when the
exchange market makes a downturn. As a trader, your goal is to
be positioned in the strongest stocks and sectors when you buy, and
in the weakest when you sell short.
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