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Finding Your Niche

Advice received from professional traders.

Finding your niche within the trading world can seem quite limiting, however this is where profits are made. After listening to several episodes from Aaron Fifield’s  podcast, Chat With Traders, it appears that professional traders who found their niche and were able to understand how a particular stock moves, fairly reliably. This way, when traders sit down to trade, their actions are mechanical, repeatable, knowledgeable, and profitable. Evidently, new traders will try to chase a trade in any industry, not fully understanding how a stock, option, or other instrument moves, then lose money. Money is lost because of not seeing factors ahead of time like the seasonality of a stock, when earnings reports were released, news releases, and other factors that can influence how a stock moves for the period. From what I have observed for the stocks I trade (pharmaceuticals, medical, biotech), earnings reports are typically good times to make an entry. I can see which stock has reliable estimates for earnings reports, and which stocks typically overdeliver in terms of earnings reports, and by how much.

Additionally, I look at a group of stocks within my niche. This comes from what I have learned in an episode of Chat With Traders, from Aaron Fifield. When events occur for a key player in a group of stocks, there seems to be a residual move with stocks that closely fits the key player, the big mover. As an example, when Eli Lilly (pharma) gets approval to move to Phase III testing for one of its drugs, then that has a net positive impact on other pharmaceutical companies that have similar drugs in development. When a drug is pulled from development, one could predict a downtrend in price action, or a shorting event. This would be a time to get out if you are already holding a stock, and follow these types of news releases or reports. This is one benefit of finding your niche. You can look to both fundamental and technical analysis and make well informed decisions when placing the trade!

HOW I FOUND MY NICHE

Carving a niche within the healthcare, pharmaceutical, and bio-tech industries

Simply, I trade what I love, and I love any and everything that deals with healthcare, pharmaceuticals, and biotechnology. Second to that, I like trading automotive stocks, because I am a Tesla enthusiast. As a trader, I trade what I am ordinarily interested in as a person. Anecdotally, I am studying biology, which lets me further understand some of the implications of the terminology in a news release, especially those surrounding drug research. I am not saying that you only need to trade things that interest you. However, doing so reduces the amount of effort it takes to learn and retain what you come across.  I personally do not care to learn about agriculture. Chances are, I will not study agri-businesses in depth to place sound trades. However, with learning about healthcare (over time of course) I have found that there are nuances that are strictly related and influential to healthcare stock valuation like FDA approval, developments of drug therapies, lawsuits, trial phases, licensing deals, etc. FDA approval does not apply to numerous industries. However, if I were to trade a pharmaceutical stock on a whim, I might overlook this, among many things. 

AN EXAMPLE OF HOW I ORGANIZE A TRADE WITHIN MY NICHE

Entering a swing trade with TEVA around earning’s report release

Here’s an example of how I cognize my trade within my niche:

  1. TEVA pharmaceuticals (long position, swing trade). TEVA has been trending downwards for a month, however the earnings report is due to come out on the 28th of July 2021. As of July 19th, 2021, there was notable volume pushing the stock up to $8.78/share from $8.24/share. My prediction is that the stock will trend upwards roughly two weeks after the earnings report has been released. My target entry for a long position is $8.81/share. My target exit to take profit is $9.20/share. However, I am going to let my winners run as long as possible. If TEVA reports are past the estimate of 0.59, I estimate that it will overdeliver at 0.62/share.
  2. Why are these my targets?  Some of my predictions are based off what I observe in the charts. The last 3 earnings reports were within 3% – 4% of the range. I set a tight stop loss if the earning report underdelivers. Stop loss is set at $8.60/share.
  3. News: Teva had a drug recall due to contamination in its cancer drug, Topotecan injections. So far, there have not been any reports of adverse effects. The batch was sent to 6 wholesalers, but the number of vials being recalled was not released. As of July 2nd, the share was down 1.46% at $9.77/share and continued to tumble all of June and July. With this in mind, the earnings projection is still set at 0.59, just like the last earnings report. I do not suspect that TEVA will overdeliver this month. If it underperforms, I will make an exit taking a loss no more than $0.20 share.
  4. News – The Group: McKesson, TEVA, J&J – Lawsuits surrounding opioids, settlements of $26 billion draw near.
  5. This will be a live trade. I am starting small, doing a 20 pip challenge for profitability. I am estimating that this stock will move within 20 pips at least… considering the earnings report and TEVA’s role in a state opioid trial along with other pharmaceutical companies.

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