Penny stocks can be best described as low priced securities which are traded over the counter (OTC). They have characteristics such as Small capitalization, a high book to market ratio, high volatility, and poor liquidity. In other words, we can say that penny stocks can be used to describe shares with a speculative appeal because of their low value.
From an investor’s point of view, they are usually high risk in nature with low trading volumes, and the companies behind them are generally small or startups with smaller balance sheets and limited resources. They can be good investments but carry a high degree of risk as well. Thus they are generally ideal for seasoned investors who understand the market and can conduct adequate research on the companies in question. Thus, it’s perfect for day traders.
Sometimes a penny stock will increase and trade almost as a mid-cap stock, even though they started out as a small-cap. Several skills are necessary if you want to make a profit from penny stocks like these. These include important qualities such as patience and investing a reduced amount of money in the beginning.
10 Factors to Consider While Day Trading Penny Stocks
Consider Important News
If by reading a press release you suddenly come across a piece of news that strikes some doubt in your mind, chances are that it’s not a good pick. The news about the particular stock has to be good enough exceptional. It can be a massive revenue increase or a partnership with a major corporation. On the flip side, press releases of stocks which say revenues were increased by 5%, cost-cutting by 3 % and others, should not be considered while day trading penny stocks.
You should always make decisions independent of other people. There can be many people who can sound very convincing and point towards buying a particular penny stock. They can hide behind the mask of forums, social media posts, and Twitter pages. Do not get easily swayed by them, and make decisions using your own analytical thinking.
Purchase and Selling
Your aim should always be to buy and sell on the same day. This is due to penny stocks experiencing huge spurts of growth in a single day only. It also assists in keeping your cash liquid. For instance, if you buy and sell on the same day, the money becomes available for you to trade 3 days later. However, if you held and sold it overnight, your money would have been free after 4 days.
Pre-set stop loss percentage
There is always a reason for a particular penny stock to be tanking. Always set up a stop loss percentage. For instance, if you lose 10% of your original investment, exit the trade. Do not procrastinate over this. Just have a plan in place that ensures that you make more gains than losses in the long run.
Do not hesitate to buy a particular stock or you will be left with a late decision. This is a common mistake made by day traders in penny stocks when they buy in late at the highest point of the wave. You should just take your profit and split.
Pre-set Profit Percentage Gain
Always set a realistic profit percentage gain target. The higher you set your percentage, the higher the risk of losing the money will be. A good target is 10% for everyday trades, 20% when it comes to trends. It may not seem much at the start, but it adds up over the months.
Never Chase a Stock Up
It may so happen that you enter a limit order on a bid price which goes up due to huge demand by the time you submit it. You then change your order accounting for the new bid price and submit yet again, by which time the bid price has also increased. If you keep chasing this stock up, you risk buying it at the highest point of the wave. Don’t bother chasing the stock up if you cannot catch the bid price within two tries.
Always Stick to your own rules and directives
As a trader, you should always set some rules and follow them at all costs. A good rule of thumb is to not buy when there is a huge spread between the bid and ask prices. The bid and the ask price is tight (ex. 0.09/0.091) when there is a lot of volume. A tight bid and ask price is thus preferred as it allows you to gain more control over your money.
Studying the Market Every day
Always spend about thirty minutes daily going over the top-performing stocks after the market closes. This is where the microcapfeed concept is important. You pull up the top 400 stocks and sort by percentage change. This will retrieve a list of the greatest percentage changes that have occurred in the penny stock market. Take the ones that have experienced the most percentage change and find out the reasons behind the increase, including the catalyst.
The exception to the Rule
Like all rules, the exception of all of these is trends. When facing trends, you can increase your percentage gain target. However, do this only when the trend is so strong and the demand is high as well. You must be comfortable taking a higher profit percentage. In all other situations, however, sell your stock when it has reached your profit percentage gain.
One of the major benefits of trading penny stocks is their very low per-share price. There is no large capital requirement. Penny stocks can benefit investors who can manage their investments wisely through research and monitoring stock fluctuations. However, while there is a possibility of generating smart profit, the chances of risking all of your investment amounts are also major. So the low liquidity these stocks have is their main disadvantage from an investor’s perspective.