The popularity of penny stocks has risen rapidly during the last ten years (even more from 2020). Thousands of traders have generated a substantial profit much faster than would have been possible by trading regular stocks.
Day trading the best penny stocks allows investors to double a relatively small investment in a short period of time. In addition, speculators can trade sizable volumes of stocks without investing a large sum of money.
The question then arises: what are the most effective strategies for trading these companies?
What are penny stocks?
A penny stock is a stock that is typically trading below $5. In most cases, penny stocks are usually small companies that have a relatively small market capitalization.
While some of these companies are listed in large boards like the New York Stock Exchange (NYSE) and Nasdaq, most of them are usually traded in over-the-counter.
Some former large companies that have seen their shares crash can also be considered as penny stocks. Examples of these companies are Embark Holdings, Kodak, Wheels Up, Nikola, and Party City Holdings.
There are several types of orders in the financial market. The two broad types are market and pending orders. Market order is when a trade is executed at the current price while a pending order is when it is executed at a future price.
For example, if a penny stock is trading at $1.50, you can place a buy-stop at $1.55. In this case, the buy order will be implemented if the stock rises to that level. In a sell-stop, a short trade will be implemented if an asset’s price drops to the pre-set level.
Actionable penny stocks strategies for day trading
1. Monitoring The Fluctuations
Due to the sizable volume of shares that a trader can purchase, an investor can make large profits by taking advantage of momentary changes in the value of the stock.
Moreover, numerous studies have shown that trading by using short-term strategies is much less risky than utilizing long-term trends that could shift at any time.
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2. Avoiding The Hype
As a result of the popularity of penny stocks, many companies have begun to artificially increase a stock’s value by encouraging hundreds of inexperienced investors to purchase large quantities of their stock.
Once the price per share has risen substantially, these unscrupulous businesses sell their own shares for a price that is much higher than its actual worth. Experts advise traders to thoroughly research any penny-stock business prior to investing.
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Investors can analyze the historical fluctuations of the stock’s value and utilize economic news related to the company and its industry to gauge whether it is a good investment.
3. Using Effective Strategies
To minimize risk and increase profits, it is advisable to consistently trade one company’s stock and spend considerable time researching that business. A trader can quickly learn to predict most of the changes in the stock’s value by using this strategy.
But use effective strategies when picking top penny stocks!
Many enterprises that are connected to penny stocks are very small-scale operations that generate only a low number of sales every month. Be aware that these companies are much more likely to collapse than small enterprises that consistently produce substantial profits.
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It is also best to choose a company that has customers in numerous geographical regions across the country, or select a business that is developing new products and services that are in high demand.
4. Analyzing Volume
When choosing penny stocks, select an enterprise that provides a high volume of shares. Day trading the top penny stocks allows an investor to purchase thousands of shares for a relatively low price.
These shares can be bought and sold frequently during a relatively short period of time to maximize profits. It is important to determine whether a large number of other investors are interested in purchasing shares of the same company.
Analyzing the volume also helps you pick the best penny stocks. If the demand for the stock is high, shares can be liquidated as soon as a substantial profit has been generated. This strategy mitigates the negative effect that may be caused by a drop in the stock’s value.
5. The Benefits Of Volatility
When trading well-known stocks, many investors are forced to hold thousands of shares for several years before they can sell them to earn a profit. During this time, the company can sell its assets, go out of business, or be purchased by a large corporation.
In contrast, top penny stocks are generally much more volatile than more valuable stocks, and traders should purchase a penny stock with a price that frequently rises and falls by a large margin during each day.
Although this characteristic can increase the level of risk, volatility will ensure that a trader will not have to hold a stock for a long period of time. A recent study has shown that buying large quantities of this type of stock can maximize short-term profits.
6. Acquiring Shares At The Right Moment
When a penny stock’s value drops significantly, a high number of shareholders will usually want to liquidate their shares; at that point, a large quantity of the stock can be purchased for a low price.
Once acquired, the fluctuations of the stock’s value should be monitored until its price reaches its average daily peak; at that moment, the shares should be sold.
Are all strategies reliable?
A common question among traders is whether all trading strategies are effective when trading penny stocks.
In most cases, traders use similar strategies when trading both penny stocks and large companies like Microsoft and Apple. Some of the most popular strategies are scalping, swing trading, algorithmic trading, grid trading, and trend-following among others.
However, the main difference is that penny stocks are relatively different from large companies in that they tend to be more illiquid and highly volatile.
Therefore, it is recommended that you focus on extra short-term trading strategies like scalping. By using this strategy, you will be at a good position to avoid overnight risks.
What would be best to avoid?
As much as we have talked about the various types of analysis, it is difficult for many penny stock companies to rely on fundamental analysis because there is very little information available.
And in this case, there is also the possibility that the few we do find are incorrect. Better to leave it alone.
Because of the nature of penny stocks, we advise most traders against short selling and a wild level of leverage, because you could lose a lot of money.
Penny stocks refer to companies whose shares are trading at less than $5. In this article, we have looked at what these companies are, why companies become penny stocks, and some of the most popular strategies to use when trading these shares.
External useful resources for penny stocks strategies
- How to buy penny stocks: tips to get you started – IG