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(Options) Part 2: The Simple (Basics of Stock Options Trading) - Trading with the Market Trends - Ne
By David Jenyns
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 stock 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 stock
price go down.
Likewise, bad news can send a stock's price plummeting. And, like everything
else market trends, are not whether the news is really good or bad, but what the
market perceives it to be. You might not think the market trend's reaction to a
piece of news makes any sense, but should not affect your trading. Always go
with the market. Remember, news overrides all other trends.
Let's say you're holding a company heading into its upcoming split. The stock
options is in a hot sector, and it's a one to four split. The stock options is
rising nicely, and the ex date is three days away. The next morning, you see
unexpected news that business in the company's 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 market trends decide it doesn't care about this news, which is not
likely, the company's run is over. You will have to get out of the stock
options. 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 trend in which stocks usually go down, significant good
news about the stock options should send it back up.
Now that we're on the subject of news, let's look at a related trend:
sympathy plays. When a stock options 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
options 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 market
trends 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
isn't how the market trends work. 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 market trends' 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 trends 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
trends 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 haven't 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 options will have most of its run left. But make sure there's no
other factor keeping that particular stock options 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 uncertain market
trends. Whenever there's a sudden general market trends 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 market trends rallies. At the same time, be
aware of which stocks are overvalued so that you'll know what to sell short when
the market trends make 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. About the Author -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=- David Jenyns is recognized as the leading expert when it comes to designing profitable options trading systems.
Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Options Trading Systems course.
Click Here To Download ==> Options Trading Systems http://www.ultimate-trading-systems.com/options.html -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
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