When you’re learning how to trade biotech stocks, you should focus on catalysts. The whole idea here is: traders and investors may buy a stock ahead of its catalyst. Consequently, the biotech or pharmaceutical stock’s price gets pushed up, and you could profit. Now, there’s one thing to keep in mind, you should not hold a stock into a catalyst event because it’s extremely risky. That said let’s learn a little about how to trade biotech stocks around catalyst events.
How to Trade Biotech Stocks – Focus on Catalysts
Biotech Trading Tools
Before you get started learning how to trade biotech stocks, you’ll need some tools.
- BioPharmCatalyst.com is one tool that I find quite useful. Make sure you don’t go to BioPharmCatalyst though, I’ve made that mistake a few times. You can find upcoming events on BioPharmCatalyst.com, they have most upcoming events, but not all.
- FDAtracker.com is another website, but it does cost around $30 a month with some useful tools. However, if you’re just starting out, you should try to limit your costs, and BioPharmCatalyst.com should be enough, until, if and when, you become profitable.
- Company websites and presentations could provide useful information. If you want to do some further analysis, after you’ve found a potential catalyst on BioPharmCatalyst, you should refer to the company’s websites to get a better idea of the treatment.
- Seekingalpha.com also provides earnings call transcripts, which could also provide useful information.
- Biotech conferences, such as the ones conducted by JP Morgan, ASCO (typically a cancer conference) and ASH. The JP Morgan conference is usually at the beginning of the year, and some biotechs typically perform well during that time. Keep in mind, these aren’t the only conferences out there, I just wanted to give you an idea that these could also be potential catalysts.
How to Trade Biotech Stocks – Important Catalyst Events
Generally, I find that Phase I trials are not that tradable since it’s still early in the developmental stages. However, if the company provides Phase I data indicating the treatment is relatively safe to use with well-defined side effects and dosage ranges, then it would move onto the next developmental stage, which is Phase II. Thereafter, if it clears Phase II, the company would move onto a Phase III clinical trial.
Now, the Phase II and Phase III clinical trials are more tradable, in relation to the Phase I. If you recall, the Phase II stage, the treatment is given to a larger group of people with a specified condition or disease. This stage involves gathering preliminary data regarding the efficacy, or effectiveness of the drug, as well as further assessing the treatment’s safety and “best” dosage.
After this stage, if the company has good data, it would move onto a Phase III clinical trial, which is conducted to confirm the effectiveness of the treatment. In addition, the company would monitor the side effects and compare the treatment to other commonly used treatments for the specified condition or illness. That in mind, when a company reaches the Phase II and Phase III stages, the company starts showing some potential value, proving the drug is safe and could be used as a treatment for the particular illness or condition.
Now, if it provides good data in the Phase III trial, then it gets sent off to an FDA approval. It could move right onto the approval, or the U.S. FDA could ask an advisory committee (adcom) to vote on whether the treatment would be approved.
That said, let’s look at an example of how to use catalysts to trade biotech stocks.
How to Trade Biotech Stocks – Example
Trevena (TRVN) announced it had an FDA approval date on November 2, 2018. That said, at the time, it was likely to have an Advisory Committee (adcom) meeting announcement beforehand. This is a prime example of a catalyst run up.
Now, I was looking to buy TRVN anywhere between $1.40 to $1.60. My profit target was $2.10 or higher. Moreover, my stop zone was below $1.30. If you can size up in a trade like this, it’s got good risk-reward potential.
Here’s a look at the chart.
I combine basic technicals and catalyst events, and I’ve found this strategy is powerful and could generate high returns. When I saw the stock had support around $1.40, I wanted to buy around that area or slightly above it. If it broke through support, the stock could’ve sold off. That said, my stop was set at $1.30 or lower.
That said, I bought some shares of TRVN.
When I saw the stock gaining some strength, I bought some more, thinking it could get some momentum.
Sometimes, you have to take profits before a stock hits your target. The market was weak when I sold my shares of TRVN for a small profit. I thought the market could’ve pulled TRVN with it, so I figured it wasn’t worth the risk.
This is just one example of a catalyst run up. Now, you need to go out and look for catalysts and conduct your own due diligence. It’s going to be at tedious at first, but if you keep at it, you could potentially see extraordinary profits with this simple-to-use strategy.
Learning about catalyst events is extremely crucial when you’re learning how to trade biotech stocks. The catalyst run up strategy could provide attractive profits, especially when you learn how to use technical analysis.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks. He’s also using his knowledge and looking to multiply his capital through options trades.