PRO Trader Tips: Biotech Edition
Trading stocks is inherently risky, especially when it comes to small biotech companies.
Much like the market as a whole, these stocks carry with them a degree of volatility, and if you aren’t careful, you can lose a lot on your investment.
Owners of Biogen Inc. (NASDAQ: BIIB) learned this lesson back in March. In one dreadful day, BIIB shares plummeted roughly 42% between March 20 and March 21.
Fortunately, there are tools at your disposal that can help protect your money and allow you to make much smarter market moves than those just winging it.
One of those tools you can use is called a stop loss order.
How to Minimize Risk With Stop Loss Orders
A stop loss is a type of stock order you can make with a broker that ensures your security will automatically sell when it hits a specific price. A stop loss limits your risk by allowing you to exit your position as soon as you hit a specific loss threshold.
In most cases people place a 10% limit order. This means if your position loses 10% of its value, this will automatically trigger your broker to sell your shares. In the case of Biogen, if you had a stop loss equal to a 10% drop, as soon as the meltdown reached this threshold, your sale would have triggered.
This would have minimized your loss by about 32% compared with those who didn’t have a stop loss in place.
But a stop loss isn’t the only tool that will immediately make you a better trader. Limit orders are one of those tools, too.
How to Pay the Right Price for the Right Stocks
Did you know you could be paying too much for overbought stocks?
Stocks don’t run up in a straight line forever. They correct, they consolidate and they often go back down before going back up again. If you buy a stock at its peak, you most likely have overpaid for a stock that is destined to correct. That’s why in biotech especially you need a limit order when making your trades.
With limit orders, you place a price restriction on how much you’ll pay for a stock. That means when you place your order, you do it with a set “buy-up-to price.” By using a limit order, you will never pay more than you are willing to.
Like with most companies, biotech stocks can change wildly overnight, so it might be a wise idea to set limits on your initial investment. You never know when the stock will explode in value or enter a free fall.
A good recent example was the flash 100% run-up in shares of Genocea Biosciences Inc. (NASDAQ: GNCA). On May 31, shares opened at $4.46. By the close of the market that day, shares had skyrocketed to $10.87.
By June 3, folks were already taking profits off the table and as of today (midday Wednesday) shares now sit at $6.41.
Anyone who bought late at $7 or higher is now in the red. Yet if you used a well-researched limit order of $6, you would still be in the green today. And if you have a stop loss set at your purchase price, you essentially can’t lose money.
That’s the great thing about stop losses and limit orders — they minimize your risk and help maximize your gains.
And simply by using these two tools you should be able to substantially increase your profits when investing in the fast-moving and lucrative world of biotech stocks.
For Technology Profits Daily,
Chief Technology Expert, Technology Profits Daily