Day Trading Small Cap Stocks

Day Trading Small Cap Stocks

As a day trader, there are many options available for you to trade. You can specialize in trading currencies, commodities, options, bonds, equities, and indices. Each of these asset classes can make you a lot of money if you play by the rules well. If you don’t, they can make you go broke in minutes. Many day traders today are opting to specialize in currencies which are usually more liquid than other asset classes. Currencies are also available to be traded on a 24-hour basis.

Broadly, there are 4 main types of equity traders. One, there are people who specialize in small caps stocks. Others specialize in mid cap sized companies. Others are experts in large caps. Finally, there are those traders who combine the 3 asset classes. Small cap stocks are small companies which have a market capitalization of less than $1 billion. Mid-caps have a market capitalization of between $1 billion and $5 billion. Companies with more than $10 billion market capitalization are the large caps.

Trading in all these equities can make you a lot of money. However, trading in small caps is usually a very risky process because of the uncertainties involved. Large investors such as Warren Buffet and Carl Icahn specialize in buying mid and large caps companies. Small caps have a number of uncertainties for the following reasons.

One, most small caps companies are usually former large or mid-cap sized companies which have fallen from billions in market capitalization to millions. There are a number of reasons why this happens which include: poor management, increased competition, natural disasters, weak cash flow, and lack of investor trust among others. Second, most small cap companies usually have a problem with reporting where their information is usually not readily available. They do not offer dividends. Last but not least, small caps companies suffer from poor management.

For day traders, small cap companies can be a good opportunity because of the cheap share price. A large cap company such as Berkshire Hathaway’s shares trade for more than 200K per share. An independent trader cannot achieve this. Therefore, if a trader has $1000, with no leverage, he can buy 1000 shares of a company that trades at $1. He can also buy 2000 shares of a company whose share is $0.5.

The first thing a trader needs to do is to study the market. This is called market scanning. It is a process where a trader goes through all small caps stocks and studies each one of them. This can be a tasking undertaking but the long term advantages outweigh the negatives. You are doing this so that you can get companies that you can understand. You are also looking for companies that are solid. Select at least 3 companies and learn a little more about them.

As a day trader, you don’t need to know a lot of details about a particular company. This is because your idea is to open a trade (short or long), wait for it to go positive, and then close it. Technical analysis is there your friend.

After identifying the companies, you should always start your week by looking at the earnings calendar. This calendar is very important because it tells you when to expect the company to release its results. It also shows you some historic performance of the company.

If the company is releasing its results in a particular day, I recommend that you avoid it. This is because you don’t know what the results are. Also, the analyst community rarely places their estimates on the small caps stocks.

After doing your analysis, you should now start your trading where you can go a company long or short. Also, you can decide to use the hedging method of trading. Where you buy a company or an asset and then go short related companies. For instance, you can go long oil, and then short Exxon Mobil.

As a day trader, you should avoid the temptation of holding small cap stocks for a very long duration. Most of these companies usually lack the intrinsic value that is usually available in large cap sizes. Mostly, they are usually heavily in debt. Once you exit the company, you should avoid trading it again for the day. If you continue doing this, you will end up losing your entire investment.