There’s one aspect of trading that doesn’t get its fair share of educational coverage, yet, I’m convinced most traders use it in some shape or form…

I’m talking about sympathy trading!

I’d bet that even if you’re very new to trading, you’ve noticed that some stocks seemingly move in tandem…

In my view, understanding what’s pushing a particular sector up or down can be helpful info to you as a trader.

Today, let me give you a brief overview of how this works and lay out a real-life example of my recent sympathy trade.

What Are Sympathy Trades?

At present, there are roughly 6,000 companies trading on the US exchanges.

As you figured, chances are quite good that not all of them are in separate and independent businesses and industries.

When a major macro event hits, it generally affects multiple companies at once – hence, we get the sector moves.

Let me give you an example: let’s say oil prices shoot 20% higher tomorrow. Will Exxon (XOM) be the only company to benefit? Or will countless other producers, refiners, and oil industry service providers get a boost in business as well?

Let’s imagine another situation: a pharmaceutical company unexpectedly reports a huge uptick in sales of a specific drug & its shares jump. What do you think the stock price reaction would be from other companies selling or developing similar drugs?

Related companies from both examples above would go up as well, reacting to a bigger macro event – this is exactly what a sympathy play is.

And, as you’re about to see from my example, a catalyst for such trade can be literally anything that affects the underlying business.

Background of My BTBT Trade

As I was entering my BTBT position, I sent out a detailed outline of my thesis, let me recap some of that here:

• Big Digital (BTBT) is a Chinese crypto mining company.

• The company is best known for its practice of purchasing pre-owned mining machines at steep discounts, as well as its decision to use the SHA-256 cryptographic hash algorithm- this allowed BTBT to generate a record of $43.95M in revenue in Q1 2021.
• The entire sector was then hit by the “China crackdown” and ban of cryptocurrency mining activities in the country, forcing numerous companies to relocate or cease operations altogether – as Chinese miners were responsible for nearly 75%(!!!) of all mining, the Bitcoin hash rate collapsed nearly 50%.
• BTBT ended up in the “relocate” crowd, as it began shipping out thousands of its mining machines to Texas, Nebraska, and Canada – the decision put many miners offline and significantly decreased the output.

My thesis for the trade was fairly straightforward and based on 2 ideas:

1. The stock has been really beaten down and on a very steady downtrend, as both the crypto market pulled back and the “fundamental” factors pushed it nearly 85% off the highs with 6% short interest – as post-relocation production was picking up, I thought a good business update can easily set it off for a bounce.

2. The name remained very closely correlated with Bitcoin, which was dipping right under the $30k support at the time. If the support held and Bitcoin bounced, it would easily take BTBT with it – sympathy trade, remember?

My BTBT Trade

On July 19th, 2021 Bitcoin was dipping under 30k, forcing BTBT even lower, to under $5, where I picked some shares up. Here’s what I wrote in my trading journal that day:

“I have a starter position on BTBT at $4.34 and will build this position around that price and look to hold it long-term to see if the company can in fact get back on track after moving out of China.”

Little did I know, both parts of my thesis played out very shortly thereafter:

1. The Bitcoin dip did regain 30k and went straight to 40k some 6 days later, heating up the sector.

2. Then, on July 26th, the company provided a relocation update, announcing a deal with an American company Digihost Technologies to jointly operate a 100 MW bitcoin mining system for a two-year term.  

The price bounce I had planned for was beginning to materialize, as shares picked some steam pre-market, but it was the intraday action that really caught many by surprise:

 The price had nearly doubled in a matter of a few hours – I closed out ~$8.09 on the day of the announcement.

Bottom Line

You shouldn’t just blindly buy a stock, because a related name or asset is moving in a bullish direction.

However, if you incorporate a bigger macro picture into your thesis – it may prove very useful when making trade decisions.

I looked at the underlying crypto market to see what effect it may have on my stock pick, and this is exactly what allowed me to be ready for this great opportunity.

Don’t shy away from learning about related market events – use them to help you make trading decisions.