Last Updated on September 15, 2019 by Sultan Beardsley
- Swing Trading is a trading strategy that involves buying a stock at a lower price and selling it at a higher price over a short period of time. Return on investment targets ranges from 10-20%.
- Identify a stocks baseline price range.
- Screen for a biotech stock with an upcoming binary catalyst such as clinical trial data, FDA Advisory Committee Meeting (ADCOM), PDUFA date (FDA approves or denies a drug for commercialization), etc. (In September 2018 we believe TRVN is an excellent swing candidate.)
- Formulate a thesis supporting the assumption that the stock will uptrend into the catalytic event. Compare your thesis to bearish arguments.
- Enter at a price near the lower end of the stocks price range 2-3 weeks before the catalyst. Do not sell even if the price goes down as long as your thesis is intact.
- Sell once your price target is reached. Do not get greedy. Operate with objectivity and completely remove emotion from decision making.
At the end of this article, we will share with you our #1 resource for identifying potential biotech swing trades and link another article that will help you swing trade.
How It’s Done
We’ve received several inquiries regarding ‘Swing Trading”. So, we decided to execute one with a biotech stock for our followers to learn what this strategy involves from the buy order to selling. The following Swing Trade Zion identified and initiated on 9/11/18. We feel TRVN is still at an appropriate entry price.
We recommend Swing Trading once you’re able to confidently recognize a stock oscillation range. Most stocks oscillate between a high and low price in the absence of significant news or binary event (such as data release or PDUFA dates). You want to identify these ranges, then simply buy low and sell high. You cannot always expect a 54% return like you’ll see Zion secured here. Often we look to take a 10-20% profit.
Price range: $1.50-1.80
Entry price: $1.65
The thesis: TRVN was at the lower end of its baseline price range and would uptrend in the next two weeks. The catalyst being an approaching FDA advisory committee (ADCOM) meeting and PDUFA date. Why would an uptrend occur? Because investors start accumulating the stock in anticipation of good news and a spike in share price, consequently driving the share price up leading into the binary catalyst (binary meaning the event outcome could send the share price up or down). In other words, fear of missing out (FOMO).
However, the outcome of the ADCOM or PDUFA is irrelevant because we sell prior to the announcement. Thus, insulating ourselves from potential negative price action due to the news being ill-received by the market. You could hold through the announcement and make even more money possibly, but you also run the risk of losing a lot of your investment.
Intraday Swinging/Day Trading
Zion increased his position at $1.79 while maintaining his core position. Another strategy you can use plays several swings throughout the day (day trading). Once an intraday price range is identified you can enter and exit several times locking in incremental profits. The following chart shows the price range Zion traded prior to the big run-up and then sold all his shares once the price target was reached.
(Notice: To day trade like this you need free cash available for investing between swings. Because after you sell a swing there is a 2 day settlement period before the money from that transaction is available to invest again)
The purple line displays Zion’s entry price ($1.65) for the intraday swing and long-swing. The red line displays the target sell price for the intraday swing. Remember, he did not sell all his shares and accumulated more at $1.79.
The values ($1.79 size:34 and $1.80 size: 177) under the trade icon in the top right represent bid and ask prices and the respective volume of shares wanted at those prices.
Once our criteria were met and the swing was executed, Zion locked in profits and leveraged his profits to buy more shares when TRVN retraced closer to the initial entry price. As we mentioned earlier, exit once you hit your price target and do not be greedy. Make a plan and stick to it, even if your position goes into the red briefly. That is a normal part of trading. Keep calm and trade on. If you never sell, than you never make money
For more info check out our article on the essential character qualities needed to be successful in the stock game. They especially apply to Swing Trading.
Identifying and Executing Swing Trades
First, screen for an undervalued stock trading at the low end of its 3-month oscillation range, and ideally has a binary catalyst 2-3 weeks out such as clinical trial results, ADCOM date, PDUFA date, important conference, earnings report, etc. Next, formulate a thesis on why the stock will uptrend as the catalytic event approaches and compare it with sincerity to bearish arguments. Always take an objective stance and be open to the possibility that your thesis is incorrect or has an unfavorable risk:reward potential. Remove emotion from the investment process completely.
Enter at the lower end of the stocks price range 1-3 weeks before the catalyst. Going into the trade have a price target in mind where you will sell for a profit. It is safer for new, small scale investors to sell prior to the binary event outcome to mitigate risk, and secure profits. We also advise against intraday swing/day trading for beginners.
If the decision comes back in favor of TRVN, yes the price may soar. But a negative decision and there goes your profits and likely a significant portion of your investment. Even what appears to be positive news or FDA approval may still send the price down if the ‘good news’ is already factored into the share price due to the runup or for some other unforeseen reason.
Again, look into as potential swing for this month if you feel like you have a firm grasp on the information discussed.
Be sure to hit the like button and leave a comment. Let us know if there is any other particular trading strategies you’d like to learn. And if you have not already, subscribe to MS Premium and get access to all our articles in addition to daily trade ideas!
Happy trading and Let’s get it!
As promised, a great resource for identifying potential biotech swing trades is biopharmcatalyst.com. On their website you can find the exact dates when biotech companies will be releasing clinical trial data, what phase the trial is, ADCOM date, and PDUFA dates.
If you are serious about swing trading than also check out this article on Modest Money in which the author describes how him and his wife generate income swing trading.