How To Buy A “Hot” Forex Stock

Provided By Ultimate Trading Systems

There’s More Than One Way To Trade A Popular Forex Stock

Even traders want to be trendy. Many traders will trade their forex stock because of public opinion, not because the trade itself makes sense. When a particular forex stock seems popular, they rush in so they don’t feel they’ve missed an opportunity. As a result they end up buying at a price point where the trade can’t possibly work out. You should always avoid the emotion of the “hot” forex stock.

Here’s an example of what not to do: Let's say you've been following a particular forex stock, which is in a “hot” sector, and it just announced a stock split. The stock is now at $18, and you calculate it could get to $25 or more by the time of the split. The market is currently bullish, and it looks like a great trade.

The problem is that the forex stock has been rising for the past four days. It started at $12, but you didn't notice it until it hit $18, and it's still rising. The stock split is a month away, and you know it's likely to fall in price somewhat between now and the split. Still, everyone is talking about this forex stock. What if it continues to rise and becomes the next blockbuster? You become afraid that if you don’t make a trade you’ll miss a great opportunity. (And besides, you want to be able to tell people that you hold a position in this forex stock, because it makes you seem smart.) So you buy 1,000 shares at $18.50.

During the next two weeks, the stock goes to $19, then levels off, loses momentum, and drifts down to $17. Then a couple of leading NASDAQ companies give earnings warnings, the market drops, and the forex stock slides to $15, triggering the stop you'd set at $16 on half your holdings. The forex stock trades in that range for a week, and then begins to rise slightly going into the split. Your plan is to sell a day or two after the split. The forex stock rises a little beyond $20.50 by the second day after the split, and then the volume dries up and you sell it for a $2 profit. But since you stopped out of half your shares at $16, you lost $2.50 per share on that half, with a net loss of $.50 on 500 shares. What went wrong?

What went wrong was that you didn't let the forex stock come to you. Instead, you chased it as its price rose, knowing perfectly well that, following the forex stock split trend, it would probably pull back before running up again. It was more likely to pull back than it was to continue on an uninterrupted run to $25, and you knew that if you bought at $18 or higher you were probably paying too much. You ignored what you knew was more likely in favour of what might happen.

You should have given the forex stock a chance to come to you, at a price you felt was reasonable. If the forex stock had pulled a surprise and never gotten down to where you thought it would, that would be okay. There were many other stocks to trade, and some of them would have come down to your price. You didn't have to own this particular forex stock.

What was the right way to play this particular scenario? When the market is bullish, it's very likely for a forex stock to rise when a split is announced, drift down after a few days' rally, and then begin to rise again a week or so before the split. If that's the trend and there's no solid reason to think the forex stock will rise immediately, wait a few days for the forex stock to drift down and stabilize before buying it. If you had done so in this case, you could have bought it at $16.50 and then sold it for $20.50 for a $4.00 profit on the entire 1,000 shares.

If you had a solid reason to think the forex stock might continue to rally, you could have bought half the total number of shares you wanted at a price that might have turned out to be too high, and waited for a lower price to buy the other half. If it had turned out to be too high, it would only have reduced your profit. (No stock goes up or down in a straight line. Wait for a pullback before buying.)

There is a good way and a bad way to trade a “hot” forex stock. The good way requires discipline and careful market evaluation. The bad way is to trade from your feelings. As you can see from this example, it’s always more profitable to trade the good way.
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