Biotech is an exciting and emerging space that’s attracted increasing investor interest in recent years.
In the current bearish market, that can be daunting for traders looking for opportunities to generate returns on biotech stocks. Here are some of the key things to keep in mind as you put together your biotech trading strategy.
Biotech Stocks Are Prone To Rising And Falling Rapidly And Often
But with any rapid-growth sector comes significant risks, and that’s also true with clinical-stage biotechs. With no marketed products, these companies aren’t yet generating revenue so their fates are entirely determined by the FDA approval process. Good news from clinical trials can generate strong growth in a stock’s price while bad news can cause it to plummet overnight.
Biotech Jargon Makes Accurate Buy-And-Sell Signaling A Challenge
This also makes it harder to rely on buy-and-sell ratings from analysts. Even if the analyst in question is familiar with the space, biotechnology is complex, and the road to FDA approval is long and winding. What looked like a promising new drug last week can be revealed to be completely ineffective the next.
Fortunately, an important element in short-term trading is whether the company can generate enough excitement about its drug to move the share price up enough for you to generate a return. So short-term trading can still be profitable even when the news is more buzz than substance.
Follow The Clinical Research Process To Find Short-Term Trades
By Phases 2 and 3 clinical trials, the therapy in development starts to be taken more seriously, and spikes or dips caused by each release of new data tend to last a little longer — and cause bigger price movements. That means traders may want to hold their position a bit longer, hoping for larger returns, but will still want to be ready for an early exit if necessary.
Learn More about Direxion’s Daily S&P Biotech Bull & Bear 3X Shares
With a sector that fluctuates as much as biotech does, and with so many small-cap companies that can soar or crash at any moment, picking individual stocks for good trading opportunities can be tough — even more so if you don’t have the medical or science background to separate the facts from the buzzwords.
That 3X leverage magnifies the returns of each trade so you can receive more exposure to an opportunity you find. Of course, any losses would be magnified just as much so it’s important to establish strict entry and exit signals and to keep monitoring the market in case you need to make an early exit to cut losses.
We believe, as long as you are careful to manage your risk, though, that high leverage and the convenience of having both bull and bear ETFs means you have the flexibility to find promising trading opportunities in any market condition and then maximize those opportunities as much as possible.
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*Sources and definitions:
**The S&P Biotechnology Select Industry Index (SPSIBITR) is provided by S&P Dow Jones Indices LLC and includes domestic companies from the biotechnology industry. The Index is a modified equal – weighted index that is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards (GICS). One cannot directly invest in an index.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
Additional risks include, for the Direxion Daily S&P Biotech Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily S&P Biotech Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
Distributor: Foreside Fund Services, LLC.
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