re: General Q for the board!
I'm publicly posting on purpose, cause I would love to hear other folks’ strategies, but be aware that this is a VERY personal question and much more about risk tolerance than anything else.
I suspect we will get as many answers as there are people on the board.
The key is for you to have a plan that you feel good about and then STICK TO IT.
Another caveat: Every trade is so completely different that it becomes very hard to have ironclad rules. I have three basic guidelines that I try to adhere to...
Guideline 1: Always buy in 25% increments.
I always have a solid line in my mind as to what constitutes a 'fully invested' position. No position is generally more than 10% of my total portfolio value except in the case below where the stock pps has dropped but nothing has changed. In that case, I may over extend temporarily to take advantage of the low price in order to cost average down, and set a sell at slightly above my new cost basis in order to get 'back down to a full position'.
I generally buy 25% increments and then look for opportunities to buy into a full position over the coming couple of weeks. I generally don't hold a position longer that 2 months.
Guideline 1B. My full position(s) are as follows:
Phase 1 or lotto play: 25% of a full position or 2.5% of total portfolio value
Phase 2: 50% of a full position or 5% of total portfolio value
Phase 3: 75% of a full position or 7.5% of total portfolio value
PDUFA: 100% of a full position or 10% of total portfolio value
Guideline 2: Be prepared to sell a losing position.
For me this is 7%. When a stock is approaching or has crossed the 7% loss line, I start looking VERY closely at it and asking the following questions:
Has anything changed since you bought in? Is there news or rumors that are dragging this position down or is it more the overall market that is doing it? (Twitter is a great resource for this kind of investigation.) If nothing has changed regarding the reasons why I bought in the first place, then I seriously consider buying more and cost averaging down.
Note: Your ability adhere to Guideline 2 can be dramatically affected by Guideline 1. If you have too large a position, you will be reluctant to sell a loser cause you “can't afford to lock in the loss”. That's when you know you are over-invested. It’s also something you might use over time to set your own guidelines as to what constitutes a full position.
Guideline 3: Always sell in 25% increments.
With the exception of selling a loser per Guideline 2. Once I have bought a 'full position' a stock that is approaching its catalyst date, I like to sell in tranches similar to the way I bought in:
7% Gain: Sell 25% of a full position
15% Gain: Sell 50% of a full position
25% Gain: Sell 75% of a full position
Hold remaining 25% until approximately 2 weeks before the catalyst
NEVER, EVER hold through a catalyst event.
Though this style of trading requires more management (cause you are conducting 8 transactions with each position), I like this approach cause I feel like I’m ‘protecting my winnings’ along the way. Again, this is a very personal decision with no right or wrong, it’s more about risk tolerance.
In my opinion, (and a feeling that has been echoed on the $heff $tation many times) BioTech Stock trading is a much about protecting your losses and knowing when to exit the winners.
Trading is all about getting base hits (5-15% gains on your investment) and minimizing number and value of your losses. I constantly remind myself that if I can grow my portfolio a mere 5% each month, I’m looking at 60% gains for the year.
I don’t need home runs
Of course all of this is only my humble opinion
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