Last Updated on June 8, 2019 by Sultan Beardsley
I am sure you have heard the saying “90% of traders lose money trading stocks”. Its a disheartening statistic considering that people enter the stock market wanting to make money, not lose it. I’ll be the first one to tell you, there is nothing wrong with wanting that! But, make no mistake, investing in the stock market is risky. Traders/investors who succeed are not of superior intelligence, necessarily. They harness certain temperamental qualities and practices conducive to making winning trades bigger than losing trades.
In this article, I am going to share 5 practices that can make you a successful trader and investor.
1) Do your homework
Data is power. Every time you submit a buy order you better have spent a sufficient amount of time researching the trade/investment. The type of homework depends on the type of trade. For instance, if you want to scalp 5-10% then fundamental qualities like revenue growth and cash position are less important than technical ones.
Based my experience, for swing and day trading, factors like momentum, retail audience size, average daily volume, float size, and catalysts, outweigh fundamentals. When evaluating a company for a longer-term investment the inverse is true. I care more about revenue trends and forecasts. Above all else I care about the quality of management and their supporting staff. A company can have a great product or service, but if the people running the company are incompetent, then everything else goes out the window.
2) Be Confident Your Decisions
After doing your due diligence (DD) and placing your trade do not be shaken by outside “noise”. With so many opinions being voiced on social media and investor platforms like StockTwits, Twitter, Yahoo Finance, and Seeking Alpha it is easy to second guess yourself. The question to ask yourself is: Is there new information being presenting that invalidates my investment thesis? If no, then do not worry about it. Even if the share price goes down after you buy. Its important to remain open to the idea of being wrong, but don’t assume you are because someone disagrees with you.
3) Don’t Panic…Accumulate
Do you ever get the feeling that every time you buy a stock it goes down before it goes up. I know I sure have. If and when that happens, do not fret. Its nearly impossible to perfectly time the top and bottom prices. Sometimes the share price will dip -20% or -30% after you buy. This can be scary, especially if you’re new to the markets. It’s important that you do not panic. Take a deep breath and wait until you can analyze the situation objectively. So long as nothing has happened to weaken your investment thesis, do not sell, accumulate. After all, if you liked the company at a higher price, why would you not like the at a lower price?I’ll share two examples of when this has happened to me, one of which is ongoing.
In April 2018 I was bullish on Galectin Therapeutics (GALT). I was so confident in my investment thesis that I put every dime I had into GALT averaging around ~$3.82, and bought calls options with $4, $6, and $8 strikes. Over the next month GALT dropped ~17% to lows near $3.15. Instead of selling, I used that month to increase my position. From May to June GALT catapulted over +200% to a high of $9.50 and I made a handsome profit.
ADMA Biologics (ADMA) is another example. I initially entered ADMA at $2.98 in February 2019. Unfortunately, I did not get in at the floor and ADMA continued down to the low $2.0 range before it charged up setting a new range between $3.0 and $4.0. Since this time I have averaged up on multiple occasions. Despite ADMA not performing well since April 2019, I have held strong and am building up my position in anticipation of substantial capital appreciation over the next 6-months to 3-years.
4) Have Realistic Expectations
Whether you are swing trading, day-trading, or long-term investing its important to be practical. Set realistic price targets going into every trade. Once that price target is hit, sell. Personally, I am a proponent of buying and selling in increments of thirds. Depending on the situation, you may want to sell two-thirds of you position once your first price target is reached. This ensures you get your initial investment back and then some. You can then let the rest ride, and potentially squeeze more out of the trade. A good price target for swing trades is a +20% gain, and +5-10% for day-trades, although there is no shame in settling for less. When investing for the long-term I consider inherent or potential value vs. market valuation. Once the company becomes over valued, or fairly priced with minimal near-term growth opportunities, I sell.
Biotech investing/trading comes with unique material events that often consume emotions and foster greed. Playing the run-up into a company’s PDUFA data (the date by which the FDA must make a decision regarding a company’s drug approval application), or data readout, is an excellent swing trading strategy. However, its very risky to hold through, and especially beyond, binary events. Bullish traders can get caught up in fanciful thinking that the company will skyrocket +200% or more after drug approval, or positive data. The reality is that under most circumstances, there is a fleeting post-approval spike (+20 to +40%), followed by a sell-off back to, or below, baseline. Once the hype surrounding a PDUFA or data catalyst is gone, the company flounders until it can deliver sufficient sales numbers, or the next clinical development. AcelRx (ACRX), Admais Pharmaceuticals (ADMP) and Verastem Oncology (VSTM) are prime examples. Even ADMA falls into this category. Conatus Pharmaceuticals (CNAT) is an example of what can go wrong when the data is poor (i.e. primary end points are missed). After missing two back-to-back phase 2 endpoints CNAT went from the $4 range to below a $1 in less than six months.
5) Take Profits
Making money in the stock market requires two actions: Buying stocks, and selling stocks. Without doing the latter your capital remains exposed to market fluctuations. An investment thesis should state that over a specified period of time, a stock should move a certain amount. Once your thesis plays out, its vital you sell to secure profits. In the case of swing trading PDUFA dates and data events, you can generally sell into the catalyst and or immediately after a spike, and then reenter for another swing after the subsequent sell-off. This is commonly referred to as “buy the rumor, sell the new”. Either way, sell and take profits. Even if its less than what you had hoped to get out of the trade. Its always better to close a trade having made money rather than having lost money.