Usually, the word "rally" is associated with racing. But it has another meaning besides the competition. In stock trading, the notion of a rally is used to refer to a period during which there is a rush of assets on the market. As a rule, it is expressed in the sharp increase of almost all quotes and the increase in total sales volume. Simply speaking, a market rally is a short period, when investors are trying to manage to buy more stocks with the maximum profit for themselves.
The most important indicator of the rally period is its duration. There are several options for defining the limits of a growing trend.
Most often this term means the time interval when the average value of goods or assets reaches its maximum. The duration of the rally does not have any fixed value and depends on the specifics of trading. Indicators can vary freely in the range from 30 minutes to several years.
What Causes A Rally In The Market
A rally can appear as a result of a number of factors. These can be a big deal, systemic investments – in short, anything that has a fundamental effect on the market. The most long-term ones are changes in tax policy, the conclusion of large international trade agreements, and changes in banking structures. Now we have cryptocurrencies, which are known for large-scale price fluctuations.
A price rally is not always a sign of prosperity. In some cases, the emergence of a constantly rising trend can indicate the emergence of a financial bubble in the economy of the region. In order not to risk your investment you must think of ways to get out of the market before the collapse begins.
Rally Examples
More often than not, rallies are local in nature and are strictly tied to the economy of a particular region. Christmas holidays can be used as a universal example. Market growth during this period can be explained by the general mood of consumers, who are in favor of buying gifts, and sellers, who are ready to reduce the price of goods to record levels.
Significant investment during this period raises market quotes on U.S. exchanges, which, in turn, contributes to the performance of European markets. Securities purchased with dollars generate increased demand, which in turn increases prices.
- It is customary to distinguish two basic stages in the Christmas rally. Pre-holiday - from October to December 25.
- "Santa Claus" - from December 26 to the end of the first week of January.
It is important to understand that even in this case, the duration of the rally has no definite limits. It can only be determined by a clear upward trend.
Technical Analysis Of The Market During A Rally
The main thing a trader is interested in during a rally is the duration of the price race. It is a period during which the price goes from the lower local extremum to the upper one. The duration of the rally directly depends on the selected time frame. Supporters of intraday trading encounter the phenomenon quite often. For example, the price movement in one direction for an hour or two is a full-fledged rally. But if a long-term trading strategy is chosen, intraday price movements turn into insignificant market noise.
On the other hand, forward-looking investors observe rallies that last for 3 months. A classic example is Apple stock, which may increase its value by about 23% over six months. Identifying a rally is easy even for someone who has nothing to do with trading. Information about a stock's rise or bitcoin's taking another peak is being passed along to most people. The main task for a trader is to identify the moment when a rally appears and guess when the process is over.
False Rally
False rallies, or short-term price rallies, can occur at every phase of a bearish or bullish market. Their main characteristic is that they are short-lived. Such rallies can occur several times during a bearish trend. Analysts and investors divide such rallies into "relief rally", "sucker rally", "echo bubbles" and "exhaustion", depending on the phase of the market.
- Relief rally. More applicable to the first phase of a bear/bull market. A relief rally is a respite from a broad market sell-off, which leads to a temporary increase in the price of stocks. Relief rallies often occur when expected negative news turns out to be positive or less negative than expected. Such a rally can last for weeks or even months before the long-term downtrend continues.
- A Sucker rally, or dead cat bounce. It is usually the second phase rally of a market. A dead cat bounce rally occurs when the market goes down sharply and for a long time, and then the stock is so oversold and cheap that value investors step in and drive the price up a bit. The phrase dead cat bounce was first mentioned by Financial Times reporters in December 1985, when the stock markets of Singapore and Malaysia bounced back after a long fall. The main sign of this type of rally is that prices are rising noticeably without any fundamental reasoning.
- Echo Bubble. A rally of the third phase of the market. An echo bubble is a small bubble, which forms when the stock market starts to recover. However, it is premature to judge a full recovery. Investors are beginning to feel less apprehension and more confidence. Eventually, the echo bubble bursts. The term comes from the observation that sonic echoes return much weaker after reflection from a surface, such as the wall of a giant cave. The phrase was first used after the fall of Wall Street in 1929.
- Exhaustion. A rally is the last phase of a market. An exhaustion rally often signals a change in the current trend because it illustrates oversupply levels, indicating that the market is oversold. An exhaustion rally is a price breakout after a prolonged sell-off. It is usually considered a sign of a trend reversal, although sometimes this signal can only be identified retrospectively. The term exhaustion can also be applied to a bull market, Blow-Off Tops are an extreme example of it: eventually, sellers suppress buyers, buyers turn into sellers, and the price falls sharply.
Trading Rules
The example of Christmas rallies teaches us that even when there is a high probability of placing a successful trade, it is only about 70%. There is no guarantee that a particular trader will not enter the remaining 30%. A rally is a long-term ascending trend, so it is better not to open short positions, and entry points are sought using standard indicators. You can use MACD, RSI, and other such things. The reason is that the trader does not need to determine the fact that there is a trend. There is a trend in the market, and that's for sure.
It is better to divide the trade into two orders. In the first case, it is necessary to leave the market at the moment when the desired level of profitability is reached, and in the second case, the indicator that will show the right moment is used.
Trading During The New Year Rally
To achieve a successful result, it is necessary not only to follow the general market trends but also to have clear confirmation of the expressiveness of the trend. For analysis, it is sufficient to be guided by the basic indicators, for example, MACD. The most important thing in the New Year rally is to choose the best moment to enter the market. This may be a major event on a local or global scale. At the same time, there should be a long-term effect on market quotations or any other financial instruments. Companies that show regular growth during the Christmas rally include the fast-food restaurant chain McDonald's, the coffee chain Starbucks and Disney. Not to forget about Apple, which usually announces the launch of new models of its gadgets during this period.
Christmas rally has some general principles but may differ depending on the characteristics of the economic structure of each market. It is most pronounced in Europe and the U.S., where Catholic Christmas is a public holiday. According to general statistics, the Dow Jones Index rises the most.
Although a market rally is not a fully understood phenomenon, a basic understanding of the process is enough to make a profit. The most important thing when trading during such a period is to determine the beginning and duration in time because going out with long positions "under the curtain" is of no practical importance. The best option for making a profit would be to participate in the New Year's rally. This is because the framework of this period is clearly limited, and the priority directions are known and well-studied, so the risk of financial losses is practically reduced to zero.
What Do Experienced Traders Say?
As analysts say, investments in stocks are great for those who are going to profit from them in five to ten years. In this case, it does not really matter when the new rally starts, and how long it will last. With proper portfolio diversification and regular investing, you can build up good capital for a secure old age. But for those players who are used to earning "here and now", experts advise going deeper into the study of market processes to more intelligently approach each step.
Conclusion
The rallying market is a great way to increase your income. There is an upward trend, you can painlessly increase your capital. The main thing is not to make a mistake with the entry and exit points. However, if we are talking about a prolonged rally, even an exit point that is not quite right guarantees high profits for the trader.
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