Penny Stocks

Penny Stock Trading Strategies

Now that we have spent some time talking about Penny Stocks and how to get started on them and we did all the research, it is time to work on dealing with the Penny Stocks. If the Stock is a good one (which you should be able to determine from the research that you did before) it is time to pick the strategy that you are going to use in order to get started.

Before we look at some of the strategies that you are able to use with Penny Stocks, we need to remember that it is not a good idea to chase a Stock. Chasing stock means that you will raise your buying price quickly because you are desperate to get the shares instead of someone else. This is a really bad thing to work with because your emotions are going to start running and you will often spend a lot more on the Stock than it actually worth. Eventually, the buyers who chased the Stock will find that the value of the Stocks will go down and the price will go the same way, making it hard to sell them at all, even for a loss.

One thing that you should remember is that it is important to pick a strategy that you want to work with and then stick with it. Most of the strategies that are listed below, as well as some of the others that you may find or hear about during your research, are going to help you to make a good return on investment if you learn how to use them properly and you should not skip from one strategy to another.

Some beginners find that when they make a trade and it doesn’t work while using one strategy, they will try to move over to another strategy and get this one to give them some of the results that they need. They assume that there was something wrong with that initial strategy and that they just need to try something else. The problem comes when they do this over and over again, switching strategies each time that something goes wrong.

This is an example of letting the emotions get in the way of what you want to do. If you are always switching strategies, you are never really learning how to use one of them and your whole plan is going to become a mess. You need to pick one and really get to know it, understanding how it works from all angles and in all situations, in order to get the best results with your trading. Over time you may find that it is better to get rid of one strategy and change it to another because the one isn’t working or you find one will work better with your style, but it is never a good idea to skip around on the strategies that you are using all the time because it is just going to confuse you and makes it harder to even see the success that you want with Penny Stocks.

There are many strategies that you can pick from, some of the trading strategies that you may want to consider include:

 

Day Trading

When it comes to day trading, the investor is going to buy and then also sell a security in just one single day, sometimes doing it several times during the day. Fortunes can be made with this kind of trading, but they can also be quickly lost. In order to get day trading to work, you need to have a lot of experience and knowledge in the particular market place you are trading, a good strategy, and sufficient capital.

There are a number of benefits by adopting day trading strategies, which include:

  • The potential profits that you can earn will be huge if you get more than one trade that is profitable during the day.
  • There is no long-term risk because you only hold a position for less than 24 hours. It is not likely that a company is going to change drastically within a day.

However, there are a few cons that come with day trading strategies.Some of the cons that you will find with day trading include:

  • You need to have an account balance that is reasonably large before you can even get started.
  • It is only suitable for those with great discipline and can control their emotions well.
  • Day trading works well with a margin account. This type of trading can make you lose more money than you put in, which can be relatively dangerous.

 

Momentum Trading

The next strategy that you may want to consider is momentum trading. This is a strategy that the investor would use if the Stocks are moving quickly, as well as on a high volume, going in one direction. When it comes to Penny Stocks, many of the investors are going to play on an upward momentum because these are not usually going to be available for a short sale.

Stocks have momentum, mainly due to some buzz that is going on around the Stock, such as through the news or rumors. To find these Stocks, you will need to do some research and read through forums, message boards, and news to find out what exactly is going on. You should be able to find a few Stocks that are getting quite a bit of attention at a time, which means that traders are going to be playing the Stock pretty hard in order to get the price to go one way, and then they will take their profit before it all goes downward again.

You need to take the time to watch how the trading activity on the Stock is doing before you make the purchase. Ones that have the momentum trading opportunities are the ones that have a really high trading volume and ones that are moving either much higher or in the opposite direction compared to the rest of the market.

So, after you have a list of the Stocks that you would like to trade, it is time to make the purchase. You will want to purchase it as quickly as possible, at as low of a price as possible, before the momentum starts to go down again. Once you have bought the Stock, be ready and watch the changes in the market, look out for changes in various trading charts, and also monitor the news. If you see that there is anything negative about the Stock, such as bad news, bad indicators, or a negative trend, you should try to do a quick sell to cut your losses before moving on; this is not a strategy where you wait it out to see if it gets better.

On the other hand, if the momentum keeps going up, you will still need to hold on to the Stocks and wait until the bids start to pile up. If the momentum is going up when you receive these bids and they are high enough for you to consider, you may want to close your position by selling the Stocks. The momentum can cease going up at any time and could start to go lower so take a side that you are comfortable with before the tides start to turn. There may be a chance of earning more if you hold on to them longer, but if you hold on for too long, you are going to lose it all so it is better to get what you can out of them.

Some of the benefits that you can observe with momentum trading include:

  • Momentum Trading works well with Penny Stocks due to its nature, which means you stand the chance to make a lot of money in a short amount of time.
  • You will be able to find a lot of information through message boards and other forums in order to pick the risk Penny Stocks.

While this is a great way to make some good money in a short amount of time, there are also some cons that you will need to watch out for. Some of the cons of adopting momentum trading strategies include:

  • Sometimes Penny Stocks are so volatile and your window to sell and make a profit can be very limited.
  • Companies that have dilution agendas can sometimes stall out a momentum run.
  • There are some people who will use this idea in order to get more people to purchase their Stocks. Fake news will be flying around so you need to be careful.

 

Swing Trading

Another strategy that you can consider is Swing Trading. This type of trading is good if you are considering a Stock that has the potential to move up and down in a short time period. With this strategy, you are not going to be that interested in the values of the Stock, but rather the trends and patterns of their prices.

In a perfect market scenario, Stocks are trading below or above a baseline value, which is also what we called ‘a moving average’. When you are experimenting around with the charts, you will be able to see a set of moving averages that will fit to the actions of the price, and this can help you out with your trading decisions. Someone who has been in the Stock market for some time would know that they should buy near the bottom of the moving average, and then they would sell before it reaches the target moving average.

There are quite a few pros that can come with this trading strategy which include:

  • This is a good strategy for beginners who are trying to get into the market and still makes some profits, mainly because it is relatively easy to execute.
  • You can use the basics of this kind of trading strategy in any market that you would like. Big board Stocks, Futures, XCM, and Forex also use swing trading.

However, there are also a few things that you need to watch out for. Swing trading is not an option that everyone is going to be fond of. Some of the cons of choosing swing trading as your strategy include:

  • It is not easy to find a perfect market where a particular Stock is going to end up trading between the resistance and the support levels. This can get even harder to predict when there is a strong downtrend or a strong uptrend that are at work.
  • Penny Stocks can make it hard to time your buys the right way, especially when dealing with dilution on the Stock that you purchased.

 

Technical Analysis

Technical Analysis is a good approach to go for, here we will cover a few of the basic ones. Anyone who picks this kind of trading strategy has to use charts in order to examine the whole history of the Stocks, take the time to observe indicators and patterns that are on screen, and then make the best educated decision out of it.

There are a few different indicator groups that you can use in Technical Analysis. Some of these include:

  • Strength indicators: these are the indicators that compares your current price to that of its history. This helps to show how weak or strong the Stock will be. The Relative Strength Indicator is the most common one to use with this. Often it is shown at the top of your charts and it will indicate any overbought as well as oversold price conditions. Many a times this can be a tip for helping you to buy and sell at the right price for a Stock.
  • Moving averages: these are known as MA’s, and they are indicators that generated by averaging out the price levels over time. These can help you to see how often the movements of the Stock are either below or above their averages. These are known as crossovers and can sometimes indicate breakdowns and breakouts as well.
  • Pattern analysis: this is the evaluation of your charts in order to identify price formations, such as shapes, that come up in the historical data. Sometimes you will see wedges, triangles, cups, handles, and more for the Stock you want to trade with. These formations can sometimes show you a glimpse of the future and determine if there will be any downward or upward movement.
  • Range analysis: this is where you are going to use a few different things together; including price range, closing prices, and opening prices in order to figure out where your resistance and support levels are. These can help you to figure out where the best purchase as well as sell points are, among other information, such as the levels of a breakdown and breakout with the Stock.

All of these indicators will help you, in one way or another, to figure out when is the best time to enter the market, how long to hold onto the Stock, and when to let them go in order to make the biggest profit possible while limiting your losses. There main benefit in adopting Technical Analysis includes:

  • There are alot people who are on the forums and the boards who will help you in learning how to use TA and will talk to you about how to identify these hot Stocks.

It goes without saying, there are a few cons that you will need to worry about. Some of these cons include:

  • Bashers and pumpers can make almost all charts look like they are negative or positive, in the hopes of luring investors without experience into performing the action that they want.
  • Using a technical analysis can be hard. It is complex and hard for some people to understand.

 

Scalping

One of the other strategies that you can use when trading Penny Stocks is known as Scalping. This is when an investor is making several trades throughout the day in order to make some small profits on one of the Stocks that really doesn’t move much during that day. The scalpers use the bid-and-ask spread to make this work. This strategy is not going to make them a ton of money, but it is better than nothing if you plan it out right and the market isn’t moving.

You can repeat this strategy a few times in order to increase your profits. While you may only make a few dollars on each trade, when you do hundreds of these, you can make a lot of money throughout the day. Sometimes this strategy will do well, but you need to be careful because most Stocks are not going to stay constant and you may end up with one that goes down in value throughout the day.

There are a few benefits that come from using the scalping method in your trading strategy. Some of these benefits include:

  • For the most part, Penny Stocks are going to have a large spread, which helps to give you a good profit.
  • When you purchase at the bid and then sell right away at the ask, you will still get the lowest price on your purchase and it reduces the risk when you sell as quickly as possible before things can change.

Of course, there are a few negatives that can come up from using the scalping process for your Penny Stocks. Some of the cons of going with this method include:

  • It can be difficult to scalp a Penny Stock because of their anemic volume.
  • This process is going to make you work against your market makers, and this makes it difficult.
  • Since Penny Stocks are high risk and this option is only going to give you a small amount of profit, it may not be the best. If you want to give it a try it isn’t that bad, but some people don’t think the risk is worth the reward.

 

All of these strategies have been widely used when it comes Penny Stocks trading and it is important to figure out which method you would like to use for your needs. You can pick any of them and see what works best for you. No matter which strategy you use, there are best practices that all experienced and successful traders follow. These are the keys that will help you in your investment journey. Here are the best trading practices that you should know:

 

Do Your Research

Do not simply focus on the Penny Stocks that you want to purchase. Keep in mind that the performance of Stocks heavily depends upon the overall performance of the business. Therefore, you must also give attention to the company itself. How is the company doing in the market? Does it match up well against its competitors? Remember to research the Penny Stocks that you intend to purchase, as well as their competitors.

The scope of research is, of course, a big task. This is one of the most important parts of trading. Also, find out the factors that affect a particular Stock and understand them. Are these factors present at the current moment? Is there any chance that any of these influential factors will appear in the future? If so, what are the consequences? The more research and knowledge that you have, the better your chances of investing in the right Penny Stocks.

 

Only Invest the Money You Can Afford to Lose

A very common advice known to all gamblers is this: “Only play with the money you can afford to lose.” This is a common advice given to average investors as well. Although trading Penny Stocks may not be considered as gambling, especially if you do not rely on pure luck, it is still similar to gambling in the sense that there is always the possibility to lose your money. Do not use the money that you need for your child’s enrollment or for paying the household bills, etc. Although there is no assurance that you will lose you money, you must only invest the money that you can afford to lose. The Penny Stock market is very volatile and it is hard to guarantee that you will make a profit.

 

Set a Limit

It is a sound advice, especially for beginners, to decide before making any trade, on a limit on how long will you continue to hold on to a losing Stock, as well as for a profitable one. The Penny Stock market is extremely volatile. Although you can expect their value to increase and decrease almost randomly, it does not always mean that a Stock whose price has just decreased will soon increase.

Part of the volatility of Penny Stocks is that a significant decrease in value can still be followed by another big drop. Therefore, in order to cut down your losses, it is important to set a limit on how long would you be willing to hold on to a losing Stock. In the same way, you should know how long you will hold on to a winning Stock. Again, even if a Stock continuously experiences an increase in value, there is still the possibility that its price can just drop dramatically, almost without any warning.

 

Look for Patterns

The movement of the prices of Penny Stocks can somehow be random. The thing is, randomness creates patterns. And, if it is not random, then there is more possibility to find a pattern. If you can identify these patterns early, then you will be one step ahead.

 

Observe the Trends

Do not just study a stock’s current record, but also check its past performance. This is a good way for you to know if the Stock is really doing well. Also, do not rely completely on the latest trends. Although the latest trends can show you the most recent performances of a particular Penny Stock, you must take note that trends often change. In fact, in the Penny Stock market, you will barely see a trend that will last for too long.

 

Know the Latest News

If you are serious about trading Penny Stocks, then you should keep yourself updated on the latest news. The many factors that affect the prices of Penny Stocks are usually revealed on the news. You should know that government interventions, economy, market behavior, inflation, among other things, can affect the prices of Penny Stocks. Take note, however, that although the news can give you valuable insights and information, what matters the most is still the actual prices of Penny Stocks.

 

Stay Calm

Bad days do happen, and you may encounter a series of losing streaks despite doing some good research. During such a moment, or the moment when you first experience your first loss, stay calm. Penny Stock market does not care about how you feel, so you must remain objective and focused.

 

Do Not Be Greedy

For beginners, it is recommended that you stick to getting small yet regular profits. Many inexperienced traders lose their money not because of buying the wrong Penny Stocks, but because of keeping the Stocks for too long. Do not underestimate the high volatile nature of the Penny Stock market. Learn to sell, cash out, and enjoy your profit.

 

Keep Your Emotion Under Control

Do not be an emotional trader. Although it is good to feel passionate about trading Penny Stocks, do not let your passion blind your judgment. Never make any trade when under pressure.

 

Make Your Own Decision

Although it is advisable to read the opinions of “experts,” it is wrong to let them dictate your investment decisions. They promote themselves as an expert even if their overall losses outweigh their profits. Of course, there are still a few real experts out there, but even the best traders still commit mistakes from time to time. After all, the process of developing your trading strategy is a life-long journey.

Instead of relying on expert advice, you should develop your own understanding of the Penny Stock market and make your own decisions. You can compare your decisions with the pieces of advice given by “experts” and see how well you match up. Of course, you also need to check the real outcome of a particular trade to see if you have made the right investment decision.

 

Do Not Chase After Your Losses

This is another advice given to gamblers. Unfortunately, although this advice is very common, many still fail to observe it. There are several ways to chase after your losses, but they all usually lead to the same unfortunate result. Usually, you chase after your losses by investing more right after you lose a trade. When you lose, you simply have this strong urge to get your money back. Another thing people do is by continuously holding on to losing Stocks, thinking that once they sell them, they would no longer save their lost investment. In any way, you are on the losing side with just a little hope of getting your losses back. The bad thing here is that you gamble your whole funds for the sake of recovering a few losses. Therefore, the risk is really high.

A good way to avoid this is by learning to accept your losses. If certain Penny Stocks fail to meet your expectations, learn to accept your losses by selling them and start all over again. When you seriously engage in trading Penny Stocks, losing some investments is normal. After all, once you get lucky and hit truly profitable Stocks, you will quickly recover all your losses and enjoy grand profits.

 

Stick to Your Strategy

During the execution process, you must do your best to stick to your planned strategy; otherwise, you will not be able to measure effectiveness, as well as its full potential. Of course, there are instances that you should abandon your strategy, especially if circumstances clearly show that continuing with your strategy will result in a total loss of investment.

 

Pump Your Stocks

There is a reason why the pump and dump scheme still exists despite many people being aware of such scheme: It works.

So, if you do not mind being a bit tricky, you can market yourself as an “expert” in trading Penny Stocks. You can put up a website and send out newsletters to your readers. You can then purchase cheap Penny Stocks, use your connections to gain interest in the Stocks, and sell them at a premium price. If you are the type that can convince people to do what you want, then this may be an easy way for you to make money. However, if you are the type who cannot exercise a bit of trickery, then you can simply take advantage of people who pump and dump their Stocks. How? Simply buy their Penny Stocks, preferably before they pump them or as early as possible while they pump their value. You can then wait for their price to increase, sell your Penny Stocks, and reap some profits.

 

Keep a Journal

Writing a journal is not required, but it is very helpful. You do not have to be a professional writer to write a journal. What is important is for you to be honest about everything that you write.

There are many things that you can write in your journal. It is also good to write your goals and reasons for why you want to trade Penny Stocks. Also, write any lessons and mistakes that you have learned. It is your journal, so feel free to write about anything and everything about your trading adventure. A journal will allow you to think outside the box and be a smarter trader.

 

Take a Break

Trading Penny Stocks has a gambling factor: It can be addicting. It is something that you can do for hours without getting tired. You would feel more like playing than working. However, when you engage in research, which is a must, that is the time where you will definitely feel that trading Penny Stocks involve serious work. Allow yourself to take a break from time to time. Remember that you will have better mental clarity if you give yourself a chance to take a rest.

 

Get the Latest Updates Quickly

Successful traders get the latest news and respond quickly. The way to take advantage of the news is by making the appropriate trading actions just before others realize them. For example, when you see that your Penny Stocks will soon encounter a massive drop in value, sell them right away. Also, if possible, know the news before it is even released in the public. To increase the probability that certain Stocks will increase in value, the Stocks should also be effectively promoted. Therefore, it is helpful if you can join and be active on online groups and forums on Penny Stocks.

 

Focus on Start-Up Companies

One of the best things about the Penny Stock market is that it is a place where you can find many start-up companies. Surely, a good number of these companies will do well. Unfortunately, some of them will perform badly and even go bankrupt. However, if you manage to get the Stocks of a good start-up company early on, you will find yourself in a winning position.

Therefore, you must exert the effort to research and analyze the different start-up companies that participate in the Penny Stock market. When analyzing a particular company, also measure how it matches up against its competitors in the market.

Growing companies have lots of space for improvements; and as their profits increase when they continue to expand, the prices of their Penny Stocks will also increase.

 

Be Patient

Patience is important when you trade Penny Stocks. Do not rush for a buy order simply because you have funds in your account. Take note that every action that you make is essential. The Stocks that you buy today are the Stocks that you will soon sell. Be patient, wait for the proper timing, and act accordingly.

 

Use the High Volatility to Your Advantage

Although many people shy away from Penny Stocks due to their high volatility, it is this volatile nature of Penny Stocks that make them a profitable investment. With high volatility, mastering the famous principle for making money is the key to profit: buy when the price is low, and sell when the price is high.