4 Rules To Trading Penny Stocks That All Investors Should Know
For those who are new to penny stocks, there are a few things you should know. First off, what is a penny stock? According to the SEC, a penny stock is any equity that trades below $5. You are going to find them primarily on the Over-the-Counter markets. That’s because the larger markets have regulations that many penny stocks do not meet.
Because they are cheap stocks, investors with smaller portfolio sizes can really use them to increase their portfolio size. They give very large returns in a short amount of time. The more you learn how to find and trade them, the more profits you will be able to make.
Penny Stocks: Rule #1 Look For Penny Stocks With A Small Spike
The first thing I would look for is to capitalize on stocks that are already moving. There are a lot of ways to find penny stocks to buy that already have a lot of momentum. The first one is to scour websites like this that report on big movers every day. We do our best to find the top penny stocks to watch each day. Of course, the idea is for you to start your research and then be able to come to a final decision whether or not to buy/sell penny stocks.
A second tactic would be the use of stock scanners. Scanners are a very helpful tool that help traders zero in on stocks they want to follow. You can set your scanner to only show stocks that are gapping up early in order to remove all the stocks that are irrelevant. Keep in mind that “relevance” is subjective based on your own personal preference and trading strategy.
If you see an upward trend, that might be a signal to add the company to your list of penny stocks before a potential breakout happens. Pre-market momentum coupled with supportive technical analysis tends to work more times than not. Again, this is to formulate a list, not necessarily a foolproof reason behind buying and selling. Think of it as a good first step.
Penny Stocks: Rule #2 Breakouts To New Highs
So, this rule is pretty simple. Basically, penny stocks that are trending upwards and setting new highs should always be on your penny stocks watch lists. These types of situations can lead to short squeezes because people who are shorting think the stock is going to go down. If the buying pressure outweighs the short pressure, then this squeeze can happen. If you can catch one of these, the profits can be incredible.
As a side note, you may want to look for penny stocks that have hit new lows. We’ve talked about cheap stocks breakout out after hitting fresh 52-week lows. Lately, this trend has been very evident. Poor earnings or a bad analyst report can cause penny stocks to dramatically drop.
However, at a certain point, some penny stocks tend to bounce and bounce big. Keep this in mind when looking for certain companies to watch.
Penny Stocks: Rule #3 Focus On Price Action
When thinking about a stock’s price action, an accurate comparison is the world’s entire history. The price action of a stock shows how a penny stock performed every day that it has been traded. Like world history, the past can repeat itself. This mindset is the basis for technical analysis and there’s a reason why it works well for technical traders.
Analyzing support and resistance lines is crucial when deciding when to enter or exit a trade. What about simple moving averages? Did the 50 SMA cross the 200 SMA to form a golden cross signaling to investors to buy? These are all important factors that come from analyzing price action when deciding whether or not to put your money in a penny stock.
Penny Stocks 101
The best part about familiarizing yourself with price action analysis is the educational aspect. The more you do it, the more you become exposed to different types of scenarios. This allows you to develop new strategies and observe patterns you may have missed when you were starting out.
Penny Stocks: Rule #4 Research; Lots Of Research
Please, and I mean please, do not become complacent when trading penny stocks. You always need to remember that their volatility can result in you incurring heavy losses if you do not trade wisely. The best way to reduce your personal risk is by putting in the extra work when conducting research. This also includes education and ongoing learning.
You will find that the more intricate your research is, the more profits you can make. There is so much information out there that can help you make more sound investments. This includes keeping up with the overall market, recent company news, financial statements, industry-analysis, etc.
So why is keeping up with market trends and company news important? Well, you will find that when penny stocks come out with very strong news the stock price tends to shoot up like crazy. If a company you like is in a growing industry, something may happen industry-wide that attracts more investors to the stock. This is what we are trying to capitalize on as investors.
[Read More] 4 Penny Stocks To Buy For Under $1 Right Now
In a similar fashion to analyzing price action, the more you research done, the better you will become. You will discover which types of information are more valuable in order to formulate more effective strategies.
Closing Thoughts On Penny Stocks
These are just a few of the rules of thumb when looking at penny stocks. To be the best, never stop learning and never rely on luck to make money with penny stocks. As with all things, investing especially, planning can play a big role when it comes to profiting.
However, keep in mind that even the best traders online are prone to bad trades. It’s how you deal with this that will likely set you apart from the rest. As hard as it may be, emotion shouldn’t play a role in any stock, let alone penny stocks.
Similar to going on TILT in poker, negative or positive emotions can cause you to stray away from your trading strategy. You may take on the extra risk you may have otherwise not especially with revenge trading. Furthermore, you may hold on to a winning position for too long and it ends up tanking at the last minute.
My point is this: always have a plan and adjust that plan along the way. You’ll definitely learn new strategies and the market is ever-changing. Learning shouldn’t stop at the basics. So take this as a very basic guide and continue on your journey to becoming a profitable trader and/or investor.