A chasm exists between lovers and haters of penny stocks. Traders on both sides of the argument are quick to put in their two cents (pun intended). So a big question remains about the hottest penny stocks…
Is it smart to follow the crowd?
My answer is a resounding “Yes!”
Another two shiny pennies rattle to a halt on the table. They are obviously mine.
My reason is simply that without a crowd, penny stocks would not move. Traders need others to buy from and sell to, thus the benefit of the crowd.
Excluding your profit and loss statement, absolutes are few and far between in trading. But there are things you should absolutely know. Here are 5 key considerations that are crucial to understanding penny stock trading.
Hottest Penny Stocks – Consideration #1: Only take long trades as a beginner
A huge draw to penny stocks is the potential for speedy profits. Quick and massive moves in price happen because small dollar increases move pennies in a big way. This is because moves in the price of penny stock are much bigger than small dollar gains in a more expensive stock.
Here’s an example:
Two different stocks are both up $0.40 in one day. The first stock started at $20. That increase makes it a 2% gain for the day, which is easy to ignore. The second stock starts at $2. The same increase makes it a huge 20% increase.
A high percent increase fuels further attention and interest. This fuels further demand and in turn, drives the price up even higher.
Although big price moves can be great, I need to pass on a word of caution. This upside volatility makes it extremely dangerous to short penny stocks. Stay safe and make sure that you consider only going long.
Hottest Penny Stocks – Consideration #2: Know the virtue of volume
Whether you are trading penny stocks or another product, you need a stop order. A stop order is a vital component of a robust trading operation. But there is a catch when using stops in penny stocks.
The crucial stop loss order that provides an enormous benefit can act against you. This happens in penny stocks that have a small float (shares that are actually available to trade). These small float penny stocks often have wide bid/ask spreads.
Wide spreads can have your stop execute early at prices far past where you actually set it. This adds uncertainty to what is usually a certainty-creating type of order. So what to do about your stops in penny stocks?
“Volume is the life-blood of your penny stock trading.”
A simple solution to this is to search for penny stock candidates that have enough volume. To be more specific, what you are looking for is a tight spread. Tight spreads keep you from paying a higher cost and from getting stopped out early.
Hottest Penny Stocks – Consideration #3: Ignore investment…truly trade
An easy mental trap to fall into when trading penny stocks is having your trade turn into an investment.
This is how the trap often happens…
A trader puts on a long position in a penny stock, hoping for it to move. It doesn’t. And instead of getting out of the trade they instead decide to hold it long term, turning it into an investment.
The trader in the example made two mistakes:
- They put on a position before they saw any action.
- Then, they decided to turn their trade into an investment.
Unless you already see increased action and attention in a penny stock, stay away. Penny stocks do not move without attention. And when attention goes elsewhere, so does the demand that boosted the price of the stock.
Even more important, don’t let this situation convince you to turn a trade into an investment. An excellent way to keep this from happening is to use shorter-term time stops. If the move that you were expecting doesn’t happen by the end of the trading session, close it out.
Close out the position even if the profit target or the planned stop prices have not triggered. Take the smaller profit or the smaller loss and re-initiate the position the next session. The longer you hold onto a penny stock, the greater the chance of it becoming an investment.
Hottest Penny Stocks – Consideration #4: Beware of stock price manipulation
Many people believe in stock market manipulation. Independent of any opinions on the matter, penny stocks are easier to manipulate. Low prices and low floats mean that one person or a group of individuals can have a large impact on the market price.
This type of manipulation can result from a statement made by the penny stock company’s management. Manipulation can also begin from a newsletter or advisory service.
“Do your research to avoid being blindsided by stock price manipulation.”
A simple solution is to research the source of an unexpected move in a penny stock’s price.
- If no legitimate news exists, it’s likely that a newsletter drew attention to it for a pump-and-dump scheme.
- When news exists, it’s important to determine the quality of the news and the reason it says price is moving.
Make sure you follow this background-checking procedure. You’ll avoid being the unwitting participant in penny stock price manipulation. This gives you the best chance of taking part in a legitimate move.
Hottest Penny Stocks – Consideration #5: Trade small and trade more
Whether you are trading penny stocks or any other market, trade frequency matters. Generating more trade occurrences matters even more for penny stock traders.
The reason is that penny stock trading in riskier in many ways than other types of trading. Get rid of the jackpot mentality. Trading is a skill. The process of trading well should be applied over and over again for the best results.
“Use the 1% of account risk rule and up your trade frequency for success.”
Here’s the best way to ensure that you are trading enough and trading small enough: Use the 1% rule.
Only risking 1% of your account per trade means that one trade is unable to have a sizable impact on your finances. It also ensures you to avoid resting on your laurels. Having a small risk per trade encourages larger trade frequency.
For more day trading techniques, tools & strategies, check out these articles:
- Which Type Of Trading Chart Is Best?
- What Timeframe Is Best In Chart Pattern Trading?
- 3 Candlestick Chart Patterns To Master
In penny stock trading, the crowd and crowd mentality are what fuel the best moves. Stay safe sticking to these 5 key considerations.
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