Trading the biotechnology stocks

In recent market rally, the biotechs have seen some major moves. Many of the drugs and biotechs related stocks have seen 100% plus moves in compressed time frame. This has attracted lot of investors to focus on them. The biotechs have a unique trading pattern. Understanding how a specific industry trades can provide you with an edge. These stocks have no sales, no earnings and when the sector is in favor they make 100 plus moves in jiffy.

Biotechs is pure speculative game. One can make lot of money in it if one manages risk properly. Some of the things I have found over the years by trading biotechs
are:

• Episodic Pivots are best to time entries in biotechs. Most biotech moves are precipitated by some news events.
• The sector gets in favor and out of favor. Mostly these things are also linked to decision cycle by FDA. When sector is in favor the more speculative ones pop one after another.
• One must buy the first breakout and on first day. It is pointless to buy second breakout. One must put full position at beginning itself. The rallies in these names are so compressed that in few days or week they make bulk of their move. So either you are in or you are a spectator.
• None of the traditional patterns work. In most cases there is one intense 10 to 30 days burst followed by long sideways move, which invariably fails. It looks very attractive like a flat base and often has upside breakout which fails. I normally liquidate my position in 20 to 22 days in such plays.
• Insider buying on biotechs is very good indicator.
• I personally never risk more than 2% of portfolio in actual investment terms on biotech single position ( on non revenue and non earnings play).I have had stock gap 20 dollars on my position once in a biotech position. Since then I only risk 2% so that if it drop 50% or more still I would not lose much.
• Playing biotech is like playing lottery. There is very high risk.

If you want to really understand the sector and what happens behind the scene in biotech, I highly recommend the book :From Alchemy to IPO by Cynthia Robbins- Roth

From Alchemy to IPO

This book is by a former Genetech scientist. It will give you an excellent perspective on the entire biotech industry. It covers both the inner working of biotechs and the business side of it. Personally I found it very useful in understanding the sector thoroughly.

If you are looking for a blog resource on biotech investing, in my opinion the "Biohealth Investor" is very good resource. It covers the latest events in the biotech and health care industry. And it does an excellent job of it as it is more focused in investors and traders.