Why You Should Consider Trading Biotech Stocks

Jeremy Biberdorf  |

Written by Jeremy Biberdorf

Have you ever considered trading biotech stocks? The biotech sector has a reputation for offering risky, but potentially extremely lucrative investing opportunities in relatively short time periods.

Buying biotech stocks is at the core of my investing strategy. In this short article, I introduce you to a few simple techniques that I use to make money swing trading biotech stocks.

Why Trade Biotech Stocks?

Biotech companies (e.g. pharmaceutical companies) make massive profits every time they produce a new drug. The process of getting a drug to market is extensive and these companies invest many years and significant capital into the development of these drugs.

These companies face many obstacles during the process during the research and development phase. They have to overcome many tests and ultimately FDA approval is required before the drug can be sold.

These challenges provide medium term investors with profitable opportunities because they are relatively predictable events that can have a big effect on the price of the company’s stock. When a company attends a conference it is public knowledge. When the company presents positive results at the conference the stock price can soar due to this ‘catalyst’ event.

Any significant milestone that is overcome can be considered a catalyst event. These events are the key to my biotech stock trading strategy because they give me a reasonably well-defined date to plan my trades around.

The secret to making money trading around these catalyst events is to be able to manage the risk. These are not long-term buy and hold investments. One of the main rules that I have is to NEVER hold the stock through one of these catalyst events. The risk is far too high that the event will cause a massive decrease in stock price.

Here is a summary of the main reasons why I love buying biotech stocks.

  • Biotech Stocks Lead the Market: The biotech index is strong in today’s market. It is massively outperforming the S&P 500.
  • Pharmaceutical Drugs Make Companies Massive Profits: The drug industry is exceptional in that when the FDA approves a company’s new drug, they corner the market for a period of time. This means that they have almost no competition which of course is amazing for the company’s sales and bottom line.
  • Acquisitions: Something as simple as a rumor that a larger company is considering buying a smaller competitor can have a big impact on the stock price.
  • Data Releases: Companies release regular updates on how a new drug is progressing through the system. These data releases can cause great optimism for the future of the company and cause a corresponding increase in the value of the stock.
  • Biotech Stocks are Volatile: Biotech companies are often very small cap and low float which means that the stock price can be hugely influenced by news releases.

These are just some of the reasons that make the biotech sector unique for traders and investors.

My Catalyst Trading Strategy for Biotech Stocks

I trade biotech stocks by finding a company that has an upcoming catalyst date. This information can be found at Biopharmacatalyst.com and includes FDA decision dates etc.

I research the company and figure out what the general feeling for the company and new product is. Social media is often a good way to gauge the sentiment. Once I have decided on the company and found a catalyst event, I purchase the stock. I ideally like to see a catalyst date that is a month or two away so that I can benefit from the anticipate price runup into the event.

This idea of getting position early works because many unsophisticated traders will purchase the stock to hold through the event in the hopes of scoring a massive win.

I learned this simple catalyst stock trading strategy from an experienced biotech stock trader called Kyle Dennis. I actually use his FDA Insiders alerts and due diligence services to help reduce the work that I need to do. You can find reviews of Kyle’s services and other useful resources at Stockmillionaires.com.

Biotech Stock Catalysts

Here are some of the most common catalyst events that occur, and you can use to ride the wave during the run up.

  1. FDA Approval
  2. Phase 2 and Phase 3 trial data release
  3. Quarterly Earnings Call

Risk Management is the Key to Success

The biggest challenge with trading risky biotech stocks is managing the risk. Many people lose money because they cannot follow their own rules and stay disciplined.

Managing the risk often means making hard decisions, especially when a trade is going against you. If you mismanage the risk, you can quickly find a winning trade has turned into a huge loss. Experience really helped me to develop my own trading rules to minimize loses.

These are my three primary rules that have helped me prevent large losses and maximize my profits.

  • I will never hold a stock through a catalyst event because the risk is just too high.
  • I always sell some of my position when I am up 10% - 20% even if I think that the stock is likely going to trend higher. This takes the stress away from the trade and often allows me to be more patient with the remaining position.
  • I cut my losses quickly. Protecting my capital is my top priority, especially in short term trading biotech stocks. I hate letting a 10% loss turn into a 40% loss. This takes discipline and the failure to cut losses quickly is one of the most common mistakes new traders make.

Conclusions

Hopefully this short article has given you an idea of why I love to buy biotech stocks. Trading these exciting stocks can be fun and lucrative.

I always recommend that you learn from someone more experienced in this sector and start cautiously. I started many years ago by trading just tiny amounts of money to get practice and slowly built up to position sizes in the $10,000 range.

If you are looking to make some extra money on the side (perhaps to build a trading account!), be sure to check out UnconventionalProsperity.com for some ideas.

DISCLOSURE: N/A


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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