There are a few different things that you need to know about sympathy play to trade them successfully. In this article, we will define what this stock market term means and discuss the advantages and disadvantages of trading them.
We will also show you how to identify a sympathy play, and give you some tips on how to find stocks that are likely to experience a sympathy move.
What is a sympathy play in stocks?
The best way to define what a sympathy play is in stocks is to think of it as an extension of the existing trend. The trend is usually started by a single company within an industry releasing positive news. This will cause a dominant effect on other companies that are related, and most of the time in the same sector. This can be a very bullish signal, causing what's known as a sympathy play.
So, if a stock is in an uptrend and another stock is not in an uptrend but is seen as being related to the first stock, then the second stock may start to move up along with the first stock.
What does sympathy play mean in stocks?
Simply put, a sympathy play is when good news from one company in an industry creates a domino effect of bullish sentiment among other companies in the same industry. When you see a sympathy play emerging, it usually means that there is an underlying bullishness in the market for that particular sector.
Sympathy play example
An example of a sympathy play is if company A releases good news about its latest earnings report. This will likely lead to company B's stock price going up as well since investors believe that company B will also do well. After the first company decides to release good news, the second one will be incentivized to do the same because otherwise, its stock price would suffer.
The key to trading sympathy plays successfully is to identify the right stocks that are likely to experience a move and to enter the trade at the right time. There are a few things that you need to know about sympathy play to trade them successfully.
What is a sympathy move?
When it comes to stocks a sympathy move is when one stock starts to move and then another stock that is similar starts to move in the same direction. This is because these stocks are seen as being related.
This relation makes investors believe that if one stock is doing well then the other should as well. It can happen through investors' belief or confirmation from the related companies releasing positive news soon after as well.
The most common sympathy moves happen when there is news in the sector or industry. This will then have an impact on the companies that are related or similar.
Advantages of sympathy plays
When it comes to this type of trading strategy, there are a few advantages that you should be aware of.
The first advantage is that it allows you to take advantage of the existing trend. If a sector is in an uptrend, then by entering into a sympathy play, you are essentially piggybacking off of that trend. This can help reduce your risk because you are following the overall market direction.
Another advantage is that it can help diversify your portfolio. If you only trade one type of stock, then you may be missing out on other opportunities that are available in the market. By diversifying your portfolio and adding some sympathy plays, you can lower your overall risk while still having the potential to generate profits.
When there is a positive sentiment in a specific industry, the crowd usually buys the top performers while selling the laggards. This provides an opportunity to buy the laggards at a discount and potentially benefit the company's decision to release good news. The laggards might release good news as well which would serve as a confirmation.
If you understand the company's fundamentals, you can find undervalued opportunities before the sympathy trend catches on for mass-market participants. Positive news can easily change a stock's price, but if you buy before the news is released, you might be able to get in at a lower price.
Lastly, it can provide some downside protection. If a stock starts to experience some selling pressure, then the other stocks in the sector may start to move lower as well. This can provide you with a buffer against any potential losses. This is because if one company starts to do poorly, the sympathy plays can still increase the price potential of other stocks within the industry.
Disadvantages of sympathy plays
Of course, no trading strategy is perfect and there are also some disadvantages that you should be aware of before entering into any trades.
The first disadvantage is that it can be difficult to enter into the trade at the right time. If you buy too early, then you may end up paying too much for the stock. This is especially true if the sympathy play does not end up happening and the related stocks are unaffected. This might cause some traders to invest in related companies simply because it is related and not due to any other logical reason.
Another disadvantage is that it can be difficult to exit the trade. This is because you may need to wait for the other stocks in the sector to start moving in the same direction before you can exit. If you are not careful, then you may end up holding onto the stock for too long and missing out on other opportunities.
For example, you might not know when to sell because the news might seem more bullish than it is. When a domino effect of positive sentiment is released, we can easily become accustomed to confirmation bias. This is when we see what we want to see instead of what is actually happening.
Lastly, you need to be aware of the potential for a false move. This is when the initial move higher does not end up being followed through by the other stocks in the sector. This can often lead to traders getting caught in a losing position.
False moves are often the result of traders overreacting to news that turns out to be false or not as important as initially thought. Remember that just because a company is related to another company, it does not mean that its stock will move in the same direction.
How to identify a sympathy play
Now that we have looked at the advantages and disadvantages, let's take a look at how you can identify a sympathy play.
The first step is to look for positive news in a particular industry. This could be anything from an earnings report to an analyst upgrade. Once you have found some news, you need to then look for stocks that have lagged in the sector.
These are the stocks that have not benefited from the positive sentiment and are still trading at a discount. It is important to remember that just because a stock is cheap, it does not mean that it is a good value. You need to make sure that you understand the company's fundamentals before entering into any trades.
The next step is to look at the technicals. This will help you to identify any potential entry and exit points. It is important to remember that you should not blindly follow the charts. You need to make sure that you understand what you are looking at before making any decisions.
If for example, you see a stock that has been in a downtrend and is now starting to break out, then this could be a potential opportunity. However, you need to make sure that the breakout is real and not just a false move. A sympathy pay can be identified as a breakout that is accompanied by high volume. To confirm this, you can look at the volume indicator on your charting software.
Lastly, you need to have a plan for how you are going to manage the trade. This includes setting your stop losses and taking profits. It's important to remember that you should not let emotions get in the way of your trading. If a trade starts to go against you, then you need to be willing to take a loss.
This is just one example of how you can identify a sympathy play. There are many other ways to do this and it will take some time for you to find what works best for you. The most important thing is that you understand the process and take the time to learn about it.
How to find sympathy play stocks with a stock screener
If you use a stock screener, you can find sympathy plays by screening for stocks that have recently had large increases in volume traded or price. This will help show the first few stocks that may be benefiting from positive news.
You can also look for news about the company, and try to figure out if the increase in volume or price is related to a piece of particular news. Another way to use a stock screener is to look for stocks that have had a positive earnings surprise. This will help identify companies that are doing well and may benefit from the good news.
You can also look for stocks that have had a recent analyst upgrade. An analyst will upgrade their rating on a stock if they believe it will benefit from the good news. Traders and investors read these reports to get ideas for stocks that may benefit from positive news.
If the report indicates bullish sentiments on the entire industry rather than just one individual company, you may want to look at the top stocks in that industry. These stocks will likely benefit from the good news and could be good sympathy plays.
Finally, you can look at the top companies in multiple industries and set alerts for them. If one or two companies within an industry are setting off alerts, that may be an indication that the industry is benefiting from positive news. You can then use a stock screener to find undervalued companies within that industry that have not yet been affected by the news.
By following these steps, you can find sympathy plays using a stock screener. This will help you take advantage of positive news and make profits in the stock market.
It's helpful to identify the different sectors within the stock market to understand a broader range of stocks that may benefit from positive news. For example, energy, healthcare, and technology stocks may all benefit from bullish news in the stock market. The following are the 11 GICS stock market sectors:
7. Consumer Discretionary
8. Consumer Staples
9. Information Technology
10. Communication Services
11. Real Estate
Within each sector, there can be sub-sectors where sympathy plays are often found. Examples of this would be residential buildings for real estate or green energy for the broader energy sector. By understanding the sector, you can get a better idea of which stocks may benefit from positive news.
While there are some disadvantages, the advantages still outweigh the disadvantages for many traders. If you are careful and do your research, then sympathy plays can be a great way to diversify your portfolio and take advantage of existing trends.