How To Trade Penny Stocks If You’re Just Getting Started
Many people hear about Warren Buffett and think that the best thing to do is invest long-term. With a large inflow of money, a small 2-3% gain equates to a large amount of capital returned. What about those who don’t have billions of dollars under management? While there are plenty of ways people can invest in the stock market, day trading penny stocks is an excellent option for those looking to make money quickly.
- Day trading penny stocks is a high-risk, high-reward endeavor
- Some strategies can help beginners reduce their risk and maximize their potential return
- Learning how to day trade penny stocks takes time and practice but can be a great way to make money in the stock market.
What Is Day Trading?
You might not know this, but there are plenty of ways to make money with penny stocks.
Day trading is one way that many investors have found to be a great source of income. Day traders buy and sell the same stock within a day’s trading session for small gains each time. The mindset behind day trading is that it will build up eventually – like compound interest in a savings account or dividends from an investment portfolio.
The biggest problem new day traders have when they start is trying to go without a strategy, which leads them right into consistent losses instead of gains. To find success with penny stocks, you need to do your due diligence before putting any money to work. Some brokers can’t handle the high volume of trades that day traders make, but others like TD Ameritrade, Tradestation, Charles Schwab, and others can accommodate.
Another problem that new day traders face is the pattern day trader rule set forth by the Securities and Exchange Commission (SEC). This rule states that you can only place 3-day trades within a 5-day trading period. While this may seem limiting, it only impacts investors with account sizes under $25,000. So if you’re starting, don’t let this rule stop you from pursuing your dreams of financial independence through penny stocks.
Penny Stocks & Day Trading Strategies #1: Harnessing Knowledge
Penny stocks are highly volatile but can provide huge returns with the proper research. Find out how to make money and stay informed in this post!
Penny stocks offer a high-risk, high-reward scenario that many investors find irresistible. They’re small- and micro-cap stocks, so they potentially have more room for growth than larger companies; they typically don’t trade on major exchanges like the NYSE or NASDAQ, so there is less competition from institutional traders who would otherwise be snapping up shares at low prices. Their share prices can also fluctuate dramatically on news about the company or industry trends.
But don’t forget: Penny stocks are risky. Many of them are not well-known, so there is more risk that the company could go bankrupt and you could lose your entire investment. Also, because they trade less frequently, it can be harder to sell your shares if things go south.
Do your research before investing in penny stocks. Make sure you know what the company does, what the sector looks like, and how the stock has performed historically. Be especially wary of pump-and-dump schemes, where scammers artificially inflate a stock’s price by spreading false rumors about it and then sell their shares at a high price before the price falls again.
#2. Set Money Aside In Case You Lose
Day trading can be a profitable way to make money, but it’s important to remember a few key points before getting started.
- Smaller trades help limit losses and protect portfolios from bad trades
- Remember that perfecting a trading strategy takes time – don’t let the Fear of Missing Out (FOMO) cloud your judgment
- Start with funds you’re willing to lose and paper trade to practice#3. Should You Plan Your Day Around Trading?
Day trading is a serious time commitment. An effective penny stock day trader puts in time and effort. This means things like being up before the markets open and planning your strategy for the day. You will also look for the best penny stocks to buy during this time.
But does your entire day need to revolve around trading? There are two schools of thought on this. The first says that you should trade all day. Spend the market’s open hours looking for opportunities to make money. There’s nothing wrong with this. But there are plenty of day traders and swing traders making money with penny stocks without focusing on the market all day.
Some take up a strategy that allows them to trade penny stocks during the day, make money, and take the rest of the day off. Also, when it comes to swing trading, some traders will build a position in certain stocks, hold that for a few days or weeks, then cash out once their profit targets have been reached. How much time you spend trading penny stocks is up to you and your personal goals. But by no means are you required to be there when the stock market opens and stay until it closes.
#3. Learn First, Trade Later
It’s okay to struggle when learning a skill for the first time. Most people will not succeed at day trading right off the bat because there is no exact science. You can either start trading with small sums of money or develop your strategies by paper trading.
The biggest downside of paper trading is that it will not prepare you for putting your money on the line. It can be a completely different feeling, and you will understand when you start to dip your toes into day trading. A good rule of thumb is that until you’re confident in testing your strategy, paper trading is your #1 friend. The most important part is to get in the mindset of whatever money is in your paper trading account, treat it like it’s real.
Furthermore, set up an account similar to how you will when you start trading with real money. If you plan to begin with $5,000, your paper trading account should mirror that.
Day trading can be a lucrative option for investors looking to make money for themselves. However, it’s essential to understand that success in this field is not guaranteed, and it takes a lot of hard work and dedication to achieve profitability. Many strategies can be employed when trading stocks, and it’s essential to find the one that works best for you. Additionally, it’s necessary to stay disciplined and patient while trading; rash decisions can often lead to financial disaster. However, with a bit of practice and perseverance, anyone can become a successful day trader.
The most important thing for a beginner is learning about the markets and understanding the strategies used. Start by paper trading and once you have a good understanding of how things work, move on to trading with real money.
When learning how to trade, it’s essential to start small. Trading with a small amount of money is less risky and can give you a better idea of how the market works. You can also use this time to develop strategies that work for you.
#4. Timing Of Trades
If you’re looking to make money for yourself by day trading penny stocks, it’s important to understand that there is no one “right” time of the day to trade. Instead, it depends on where trading momentum is when you’re looking at the stock market. Furthermore, you can also monitor different momentum sources when news, filings, or global events come to light.
When it comes to “timing,” it’s also important to know that you will rarely sell at the very top or buy at the very bottom. Understanding how to read charts and research using technical analysis can come in handy. Plotting a move and identifying things like strong support and resistance can help you pick price levels for buying penny stocks and then doing
#5. Utilize Limit Orders
If you’re looking to make money for yourself through day trading, it’s vital to utilize limit orders. This will help you buy and sell at the prices you want and prevent you from taking too much risk. Remember, it’s crucial to stick to a plan that limits your losses – so always have limit orders in place. By doing this, you’ll be better prepared for the volatility of penny stocks.
Let’s say that you’re watching a stock that’s bouncing between $1 and $1.20, and you see that it’s currently trading at $1.20. You could set a limit order to buy at $1.03 because you’ve seen that level as relatively more substantial support on the chart. This way, if the stock does drop back down again, you’ll be able to get it at a better price.
As you become more advanced at day trading, you will have many trades ongoing simultaneously. Limit orders will help you buy and sell at the prices you want, even when you cannot monitor certain stocks. Utilize these orders to make money for yourself through day trading penny stocks.
#6. How To Trade Penny Stocks & Make Money Through Identifying Targets
Making money through day trading is a goal that many investors aspire to. However, it’s important to remember that no trader is successful every time. The plan is to make more money on good trades and lose less money on bad trades. It’s also important to be aware of the potential for a stock to quickly swing in the opposite direction, even if it’s only a penny stock.
One way to help limit losses and maximize profits is through something called tier trading. This involves splitting up your capital and buying stock in different tiers. For example, if you have $1,000 to invest, you might buy $250 worth of a penny stock, $500 worth of a stock at a higher support level, and $250 worth of stock at an even higher support level. Consider the first tier as your “testing the waters” tier. It’s only a tiny portion of your total capital. If the price continues higher, you can move along with the original plan. However, if the stock does not do what you expect, you’re only losing a small percentage of your investment. A 50% loss on this Tier 1 example equates to $150. If you were to have invested the entire $1,000, that loss is monetarily much more significant.
No matter your strategy of entering or exiting a trade, you want to have proper targets set. This includes entry targets, stop loss levels, and exit targets as the trade hopefully works out in your favor. A “going to the moon” strategy is great if it happens, but the vast majority of traders who consistently profit set a plan stick to it, and if a trend is truly strong, there will be plenty of opportunities to re-enter.
#7. Keep A Cool Head At All Times & Stick To The Plan
Making money by day trading penny stocks can be a very lucrative endeavor, but it is essential to remember that it takes time and effort to become successful. Like any other profession, some skills need to be learned and practiced to achieve profitability. One of the most important skills is maintaining a cool head and sticking to the plan.
When it comes to day trading, having a solid plan is key. This means predetermining the best stocks to buy according to your strategy, knowing when to sell, and how much to risk on each trade. It is important not to let emotions get in the way of making rational decisions while trading. This can lead to impulsive revenge trading, which can be costly in the long run.
It is also important to remember that no one ever went broke taking profits. So, if your plan dictates that you sell a stock at a specific price, it is best to stick to the plan even if the stock begins to move in the opposite direction. Chances are, there will be other opportunities to get back in the trade later on if the trend is strong. And, if the trend is weak, it is likely to eventually break down.
Remember, successful day trading takes time and practice – but following a solid plan will get you closer to your financial goals!