Experience Matters In This Game

“Learn to trade in our weekend bootcamp!”

“Take our course and learn everything you need to know about trading!”

“Learn our easy system and start making cash!”

You’ll see variations of these statements made by FURUS trying to sell you their courses or chatrooms or whatever else product they have related to trading.

Of course, it’s bullshit. Trading isn’t easy. It’s not something you can learn in a weekend. It can take years to master.

One of the problems with these statements is that they ignore just how important experience is in this game.

Over your years as a trader, you’ll begin to see certain things repeat themselves over and over. And sometimes it can take years to see these things often enough to where you can recognize them and act on them.

No course or bootcamp or FURU can teach you this. Only experience in the trenches can teach you this. This is why the best traders are the ones who have been at this game for several years…the traders whose eyes are tired from the thousands of hours they’ve put in front of their multiple desktop screens.

…the best traders are the ones who have been at this game for several years…the traders whose eyes are tired from the thousands of hours they’ve put in front of their multiple desktop screens.

Experience Matters … an Example

Yesterday (11/11/2020) I shorted FPRX. It gapped up huge (321% above its previous closing price) on positive phase 3 data for a stomach cancer study, and so I started into a short position premarket, and continued to add to my winner through the day. I ended up with an average of $20.09 after all my adds (my first short was at $23). I was looking for an ADF (all-day fader), and had a target of between 15-16. I knew they had an ATM (at-the-market) offering out there, meaning they would be selling stock through the day to help them raise cash to fund their research, which would put downward pressure on the stock. I also knew they had a $250 million shelf to offer even more stock. Given they were a biotech in need of cash, they likely would tap into that shelf as well.

The stock closed at $18, and I held my position, intending to hold overnight. Sure enough, right after the market closed, they tapped into the shelf and proposed an offering of 5 million shares of stock. The stock quickly dipped under $17, only to rapidly recover back to $18.

And this is where experience came in. I knew that it was unlikely that the stock would get to my target now, simply because of what I’ve seen in these situations in the past. The stock had multiple analyst upgrades, many of which had new price targets well over $30. As discussed in the InvestorsUnderground chatroom, the company had likely already blown through their ATM during the day so there wasn’t any more stock left to sell from that. And the stock failed to stay down after announcing of the new offering. The proposed offering was also effective, which means they could price it at any time. Given I’ve seen these types of phase-3 positive stocks price very well (like MCRB on August 11th), and given that the market wasn’t reacting negatively to the offering news, I knew it was too risky to hold the stock short any longer. So I covered at $18 for a 3R profit (meaning I made 3 times the money I had risked). And that was smart, because the stock began to climb after hours, hitting a peak of $23.50. My profit would’ve evaporated had I been stubborn or if I had failed to recognize the situation.

And if I didn’t have all of the experience that I do (I’ve been trading for 13 years), I most likely would’ve failed to recognize the situation.

No amount of trading courses can prepare you for a situation like that. You have to have the experience of seeing these types of situations in the past to recognize them. While my exit rules told me to hold, experience helps tell you when it’s time to break the rules. This was one of those times.

I’ve Seen This Before

I knew to break my rules this time because I’ve seen this before several times. A perfect example is MCRB back in August. MCRB gapped up 333% on 8/10/2020 on positive phase 3 trial data for colon cancer, opening at $20.13 from a previous close of $4.64. Like FPRX, the stock got multiple analyst upgrades, with new price targets well above $30. On 8/11/2020, it closed red at $20.04. They needed to raise money, so an offering was likely. After the market close on August 11th, they announced a proposed stock offering.

Now, offerings on biotechs are USUALLY good news for shorts, as offerings are typically done at a steep discount (if you don’t know, biotechs often sell new shares of stock to help raise money to fund their drug research). The stock will often tank near the offering price, where it’s generally a good place to cover your short for a profit. A perfect example is APTX. It ran huge on 10/20/2020, going over $6 on positive phase 2 trial news. The stock closed at $4.30. After the market closed, they announced a proposed stock offering. The stock briefly tanked after hours to $3.25, only to recover near $4. The stock closed at $3.90 the next day. They then priced the stock offering at $3 on 10/22/2020. The stock tanked that day, hitting a low of $3…right at the offering price. This price was at a 23% discount to the previous closing price of $3.90.

Thus, it’s usually a good idea to be short going into an offering and waiting for it to be priced (which is why I’ll usually hold these short). However, that isn’t always the case, especially with phase 3 trials. When MCRB announced their proposed offering after the market close on 8/11/2020, the stock didn’t do much. The stock climbed back to close at $23.56 the next day. They then priced their offering at $21.50, a 9% discount to the closing price. The market loved the fact that it wasn’t much of a discount, and the stock went to hit $30 the next day. Thus, trying to hold short into the offering wasn’t a good idea in this situation.

Thus, while holding stocks short into offerings is usually a good idea, it isn’t always a good idea. For biotechs, it may not be a good idea if:

  • It’s positive phase 3 news
  • The stock has multiple analyst upgrades from top banks, with prices well above the current price
  • The stock isn’t low float (i.e., the number of shares that are publicly available to trade), so any additional shares from an offering won’t depress the price much

FPRX and MCRB met these criteria, which is why they weren’t good candidates to short into an offering. APTX didn’t meet these criteria. But it takes experience and seeing these offerings over and over and over again to know when to hold ’em, know when to walk away, and know when to run.

…it takes experience and seeing these offerings over and over and over again to know when to hold ’em, know when to walk away, and know when to run.

Rules…Made to Be Broken But Only Occasionally

As a trader, it’s important to have rules. You need rules for selecting trades, for entries, and for exits. Following your rules will help you stay out of trouble and also be consistently profitable. However, the market is very dynamic, and you also need to know when to be flexible with those rules. Only experience can teach you when you need to be flexible, and when you don’t. Put in the screen time, and you’ll eventually see things happen over and over and over to the point where you’ll be able to make good risk/reward decisions.

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