I get this question all the time, “How do I trade biotech stocks?” Well, trading biotech stocks is very difficult due to the fact they’re highly volatile. There are a lot of factors that affect biotech stocks, such as various data releases and news. That said, if you want to learn how to trade biotech stocks, you will need to have some grit and keep at it until you figure it out. It helps to have a trading community to fall back on, especially if you’re new to trading. That said, let’s get into some of the basics of trading biotech stocks.
How to trade biotech stocks
When you’re learning how to trade biotech stocks, you need to keep in mind you need to have a high risk tolerance because these stocks could move. That said, one of the first things I do is scan for upcoming catalyst events. One website that’s great for research upcoming catalyst events is BioPharmCatalyst. For example, here’s a look at some upcoming Food and Drug Administration (FDA) events.
This website provides a database of biotechnology or pharmaceutical stocks with upcoming FDA events. If you’re learning how to trade biotech stocks, you need to know what events are coming up, especially if you have a position in the stock.
For example, if you are long Regeneron Pharmaceuticals (REGN), you probably do not want to hold into a phase III data release. Generally, Phase II and III data releases affect stocks more than a Phase I clinical trial release. You might notice a stock down 50% because it released some poor clinical trial results. Holding into a data release is extremely risky, and you should never do this, if you’re learning how to trade biotech stocks. Never let one bad trade ruin your trading account. In general, I like to get in before a catalyst, and this is known as the catalyst run up. A lot of the times, you might see a biotech stock rise into an event. Our community is looking to capture this move and get out of the stock before the catalyst event.
After we figure out when and what the upcoming data release is scheduled, we look at the charts.
Basic patterns to learn how to trade biotech stocks
I don’t use any fancy chart patterns, just basic support and resistance. For example, Selecta Biosciences (SELB) would be an example of a catalyst run up.
If you notice in the table above, SELB is expected to Phase II data during the first half of April 2018. This would be a prime catalyst run up trade.
Here’s a look at the daily chart of SELB:
Now, I’m looking to buy this near support, so around $8.50 to $9.50. I would stop out if it gets to $8 or below. With SELB, I would look for a break above resistance, or $11.50 or higher. In my opinion, this is a good risk reward trade because if the stock does start to run up ahead of the catalyst event, it could break out. Again, I wouldn’t hold into the event.
The bottom line
When you’re learning how to trade biotech stocks, you need to be wary of upcoming events. One of our favorite trades is the catalyst run up. In other words, we’re looking for the stock to run up ahead of a catalyst event. Thereafter, we’re looking to buy at support for a break above resistance.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.