Rally Alert: Biotechs Take Flight
I can guarantee you one thing this Thanksgiving…
As soon as I get the chance I’m going to kick my feet up, crack open an ice cold beer and watching the ships lazily come and go along the Naples waterfront.
Speaking of ships…
It certainly feels like a rising tide is lifting all ships in the biotech sector.
Last week the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) quietly set up for an extended move higher.
The first hint of a major rally came late last month when Biogen Inc. (NASDAQ: BIIB) revealed additional analysis of clinical trials for its Alzheimer’s treatment, aducanumab, showed promise. After essentially declaring aducanumab a failure earlier this year, the company is now planning to submit its application to the FDA in early 2020.
Since BIIB is a top-10 holding in IBB, the strong reaction helped drive the ETF higher. Weeks later, the move is even more amplified as other big biotechs attract new buyers.
And if these names can stay moving in the right direction, the biotech sector has a great shot at making an honest push toward new year-to-date highs and possibly even breaking out in a much bigger way.
And thanks to this strong performance through November the IBB has now smashed through its recent ceiling the door of its July highs.
Something much bigger could be brewing in the sector. Don’t sleep on these stocks…
But since biotechs can swing very violently… you need two tools to ensure you max your gains and don’t lose your shirt.
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 example was the flash 100% run-up in shares of Genocea Biosciences Inc. (NASDAQ: GNCA) in May of 2019. 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 in just a few days shares had traded back down to $6.41. Anyone who bought late at $7 or higher fell into the red, and quickly.
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 couldn’t have lost money.
That’s the great thing about stop losses and limit orders — they minimize your risk and help maximize your gains.
For Technology Profits Daily,
Chief Technology Expert, Technology Profits Daily