Generally speaking we're all pretty aware that a "Buy & Hold" strategy works well. Yet, we find outselves "trading". Despite the evidence indicating this is unwise.

In a snapshot view we can take a look at the daily chart (nearly a years worth) and view our 3 stocks in the Biotech basket - and we can pick up some obvious patterns.

  • These stocks are very much sentiment based. They swing wildly, before Earnings calls - but less after.
  • These stocks move with extreme volatility . This is typical of sentiment driven stocks.
  • These stocks offer plenty of activity for a swing trader, or scalper, and show trade-able features.

I'd like to talk about rebalancing.

The items I mentioned before are true, and seem as though they add up to a perfect suite of scenario's for a trader to load up on downtrends midcycle before an earnings call. I wouldn't argue with that type of play, I think it'd probably make quite a bit of money. Especially if you were doing it with derivatives. That is a great strategy. There are many that could be applied. Today, we're going to explore a boring one: Re-balancing.
Selecting a basket.
This is no small feat. Many people would pull up a screener and begin going to town on fundamentals, reading news, and generally looking for data which would show a stock in our Biotech sector to either be developing "an un-fair advantage" or to "be significantly mispriced". That's ok. You SHOULD do that. Thats called research, and it should be the majority of what you do as a trader. It should be be even more-so as an investor. Today we cheated. Thats right.
We took a look at the Portfolio of Orbimed's top ten holdings, and decided to look at three stocks which in the last quarter Orbimed was bullish on. Orbimed chose to increase holdings of 3 companies. REGN , CI , NASDAQ:VRTX , and we will use these 3 stocks as our basket today. Why? Because they're good stocks.
Prove it?

Now what is re-balancing and why does a trader care?
Rebalancing is a tool most commonly used by Investors. It is useful because it keeps an Investors Risk Management in correlation with their Risk Appetite. This is important, especially for long term holders. In a group as volatile as Biotech, it is even more important - as it lends well to to explosive compounding and can lead to wildly unbalanced portfolios in a relatively short time. One of my favorite examples of rebalancing (and the only one we will discuss here) is practiced by selling and buying based on risk thresholds. A threshold is set like so:
  • Define a risk appetite (percentage of holdings to go into a given asset class)
  • Define a risk factor (percentage of individual positions of a given sector of holdings)
  • Manage risk (buy or sell from a position to meet the percentage guidance originally set)
I.E 33% REGN , 33% CI , 33% VRTX
Keep in mind you can overweight or underweight any position you choose. Afterall, it is your portfolio, and you are a trader!
Why do you care?
Following this set of principles gives the trader Long-term-guidance. This is one of the most overlooked portions of a traders strategy. There must be some form of long term guidance. This is why a trader should care. We looked at the stocks aforementioned and pointed out many points for which a trader could buy, or sell, to seemingly outperform the market. Likely, a good trader with good indicators trading in between earnings calls would indeed do well.
Now lets take a look at the long term.

To Be Continued....
Kommentar: We now have a general-guidance to which we can trade with. The real question is what do we do with it?
Well this is where we put our trader hats on!

We know that we have times when we want to sell. We know that the INVESTOR would trigger his sells based on his portfolio growing to heavily in favor of a given asset. Thats fine, and that certainly applies to us as well - except, we are interested in timing our sales more than that.
So how do we define the timing? Well, if our threshhold is 27%-33% the Investor in us will be notified when any of the 3 stocks outperforms or underperforms the others. From there we have to make a decision. Do we trade our way out to reblance the portfolio to our percentage? Or do we begin plotting indicators?

Seen above... I have applied Fibonacci indicators using the rally local rally to decide when its time to sell or acquire. Now every trader must decide for themselves what to go by, but as you can see here if a trader were to initiate sells anytime the Fib crosses the 78.6% retrace, the portfolio owner would be VERY happy in the end.

The real trick is deciding when to buy right? ... well, whenever we are ripe with cash, and our portfolio is out of balance, one of our holdings will be below our risk appetite. It will REQUIRE a trade. From here, we can pick any strategy we want once again, to decide a strong time to acquire.

When to buy
This is probably the most difficult part of the whole thing. This is where traders often pull their hair out. Investors get scared at the top, and traders freak out at the bottoms. Why? Investors want to sell tops and hoard cash, and traders want to catch bottoms and ride the swing. This usually happens inversely - the Investor waits too long trying to find his top. The Trader pulls the trigger to early or too late looking for that absolute BEST buy-in. You could use fib-resistance arc's to look at the timing of getting back in :

Or various other methods.

My recommendation, is you let the Investor teach you about buying - and do it when you're sitting cash rich, and your portfolio needs to be rebalanced; by acquiring in the portion of your portfolio that is underweight for your risk appetite.

Thats a pretty boring trick, I know.

Thanks readers! I'll be taking this and applying it elsewhere soon!
awesome write up! still learning but was doing this today due to all the fake FUD on a bittrex/tether FUD news story. i wanted to sell into the panic and buy lower was my idea today to lower my risk/exposure.

what i am wondering is jumping back in to buy and that's my issue being so new to this space. i will try the fib arc's and see how that works out. still devouring info from everyone that shares and trying it all out myself than being led blindly.

@codei, I recommend having a plan. Choosing a few winners, and buying on lows. Using long term orders -- stop-losses and limit buy's.
Let the stop losses liquidate winners.

Let TA show you retraces of coins you like - and set limit buys that grow with the size of the retrace. Say 10% of your investable into that asset at the 23.6% fib. Say another 15% at 38.2% and 25% at the 50% retrace level. You'd be amazed how many orders you fill this way... and how often you will be in the money by the time you check your portfolio next.

Just a sneak peak how I manage my TA with my portfolio... :)
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codei nukenowakowski
@nukenowakowski, i will take that to heart! thank you!

TA time frame wise in crypto(since it's pretty wild)... would you recommend 4hr chart as a minimum to accomplish this for the long term? or would you re-balance on a shorter time frame?
@codei, lol... I usually do analysis on the Daily. I check along Daily, 4 hr. 1hr and I'll watch the 15 minute chart. I watch the 15 minute chart when I see little trend reversals; to keep an eye on the volume.
The 1 hr chart is usually only to get an idea at shorter timeframe MACD. No real value there... its just to help me visualize the long term trend that the daily is showing me, and I visualize the fractal nature of what the 15minute chart is doing in the quicker timeframe.

TA along the 15 minute, or 1 hour, isn't going to make you much money. Not in my opinion. Scalping is doable, however to be able to make it sustainable, you would have to be a TA wonder-kid who was right substantially more of the time than any trader has proven to be able to do. I don't recommend rolling the dice on that.

I recommend trading less often, and trading with more conviction with strategies, and assets, that you're familiar with.
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