If you have been toying with the idea of trading penny stocks but don’t know what the process for doing so exactly is, you should find the information in this article to be immensely valuable.
What are penny stocks? In basic terms, penny stocks are simply stocks that sell for less than $5 or $1 a share. They make an attractive investment opportunity for investors who lack the capital to invest in higher priced stocks and commodities.
Here are the five steps you can follow to start trading penny stocks today:
SWING TRADING PENNY STOCKS
Swing trading penny stocks is going to require a great strategy and good penny stocks. Penny stocks, according to the SEC, are stocks that are $5 and under.
Since a lot of these stocks trade for pennies, they’re not found on major exchanges like the New York Stock Exchange. The major exchanges delist stocks that go under a dollar. You have to go pink sheet or OTC to trade them.
An issue you may find when trading penny stocks is the large bid ask spread. The bid ask spread is basically telling you the highest price a buyer is willing to go and the lowest a seller is willing to sell.
The larger the spread is, the less liquid the stock. When a stock isn’t liquid, it’s not moving as well. What this is telling you is that this particular stock isn’t really being traded and has no volume.
Large bid ask spreads make market orders fill at prices that you don’t necessarily want. Sometimes you may have to swing trade penny stocks without wanting to. Read our post on the difference between market order and limit order.
Look at the volume and bid ask spread before placing a penny stock trade. Otherwise you’re going to feel like this guy waiting for a profit.
SWING TRADING PENNY STOCKS – WATCH OUT FOR THE PUMP AND DUMP
Did you know that the penny stock sector has more selling than buying happening. This is because there are people who are paid by companies to pump their stocks.
These manipulators aren’t making money by trading the stocks they’re trying to get you to buy. Instead they make their money from being paid to get you to place the trade.
That’s not to say you can’t make money from a pump and dump scheme. In fact, if you’re well aware of what it is you can take advantage. A typical pump and dump is usually a 2 to 3 day pump followed by a dump.
This isn’t the case 100% of the time, although, it is the most common pattern. What is swing trading? It’s holding a stock overnight up to a couple weeks.
If you’re swing trading penny stocks that are clear pump and dumps, then holding overnight may be possible. However, it’s also super risky. Set a stop loss so if it does dump, you’re not out a lot of money.
If you’re not careful, swing trading the pump and dumps can feel like a wrecking ball hitting your brokerage account.
SWING TRADING PENNY STOCKS – TRADE THE PATTERNS
Swing trading penny stocks is going to require patterns. The charts don’t lie. If someone is telling you that a stock or sector doesn’t follow the charts, then run the other way. Especially if you don’t have proper stock market training.
The charts confirm pump and dumps. Head and shoulders patterns are a popular pattern to look for. Why? Because it’s known as the F you pattern. Which is what happens if you get caught at the end of it’s formation.
The importance of patterns, volume and the bid ask spread is going to your saving grace when swing trading penny stocks. Only trade the best set ups. Don’t listen to the advice of other people without doing your due diligence.
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