Ready to start trading penny stocks? Do you have your account set up, cash transferred in, and prepared to place your first trade? Take a deep breath and know what you’re getting into. This article will go over some of the most valuable tips for trading penny stocks (and stocks, in general). The stock market doesn’t have to be a game of roulette. Knowing even a few trading tips can set you up for success.
What Are Penny Stocks?
Penny stocks are shares of companies that trade for less than $5. Some traders consider a “penny stock” as one trading for under $1 – a true ‘penny’ stock. Whether you subscribe to the former or the latter, the goal is to make money and repeat the process.
For those who’ve decided to step into the realm of penny stock trading, you should know a few things before getting started. Making money with penny stocks is the core focus. The second is being able to find penny stocks to buy. Knowing when to sell for profit (or cut your losses) goes along with that. Here are some tips you can pick up along the way that will serve as a helpful tool.
Penny Stocks To Buy
Penny stocks are incredibly volatile, and for a good reason. Lower prices, lower liquidity, and lower levels of market awareness at times are all things that have contributed to the wild market fluctuations. Even speculation can become one of the overreaching drivers of trading action, more so than any fundamentals there may be. Believe it or not, even the slightest rumor or sympathy sentiment can “dress up” the “ugliest” penny stocks.
We saw this during the big cryptocurrency push in early 2022, the cannabis boom in 2018 and 2021, and the recent boom in “meme stocks” are all examples of how outside forces can dictate the pace of specific stocks. If you’re looking for penny stocks to buy, make sure you have a strong skillset for all market conditions. Here are a few trading tips to help.
Trading Tip #1: Penny Stocks With News – Is It Important?
Penny stock news can become a considerable signal that can act as a significant catalyst depending on the type of news being released. We’re talking about things like earnings reports, leadership changes, mergers & acquisitions, etc. are instances that can impact a stock’s performance.
The great part about using news as an indicator is that media headlines pop up nearly every hour of every day, sometimes every minute. These updates can become associated with industry updates or have nothing to do with them. It becomes the trader’s task to sort through all the info to find the necessary “nuggets” they need.
Sometimes the headlines are all traders read and act upon. However, in many cases taking time to read beyond the headline and pick apart the details can be a huge asset if you’re not a trader who scalps (trades that last for minutes). There are plenty of cases where the headlines may appear incredible, but the exact details aren’t as exciting. In that case, once those bland details emerge, bearish sentiment can take over. That can quickly pose a risk to traders who aren’t as aware of the risk/reward ratio when acting solely on news headlines.
Trading Tip #2: Penny Stocks & Trading Volume
One of the next areas to look into is volume. How many shares are trading in specific penny stocks compared to the trailing average? The volume of trades is a good indicator of the stock’s price patterns and potential future movement.
If a company’s volume is on the rise, this generally means that traders have recognized the stock’s price and are buying more shares, hoping to make a profit. However, it should be noted that just because a stock is trading with higher volume doesn’t necessarily mean it is time to invest in the company.
It’s also essential to understand the “type” of volume you’re dealing with too. Just because there is a “high” volume, that’s not always good. Shares of Netflix (NASDAQ: NFLX), for instance, traded at their highest level of volume on April 20th, 2022. But it also coincided with one of the most significant share price drops in its history.
On the opposite end of the spectrum, Digital World Acquisition Corp. (NASDAQ: DWAC) hit record volume levels during its first few days of trading, which coincided with a price spike of over 1,600%. So if you’re looking for penny stocks to buy based on volume, it’s best to take a closer look before jumping in, head first.
Trading Tip #3: Watch For Trends In Certain Penny Stocks
Earlier in the article, I alluded to the idea of “sympathy” sentiment playing a role in the stock market. With the rise of retail traders and investors has come a surge of speculative activity. Whether it’s an analyst saying one thing or insiders buying or selling shares, that can trigger a ripple effect across certain stocks. The crazy part is that it might not even be industry-related. A few weeks back, we saw the rise of a strong bullish trend in low float penny stocks under $1 (talk about specific). Sporadically, this trend emerged as penny stocks under $1 with public floats of less than 20 million shares began jumping like popcorn.
Similarly, there was a sweeping bearish trend in penny stocks with underlying companies that had exposure to Chinese markets. Thanks to uncertainty on the future listing in the US, many feared Chinese company stocks would get delisted. The surge of selling pressure, based mainly on speculation, cut prices of related stocks. Sympathy trends are a daily occurrence, but when talking about “trends,” you also can’t ignore the ones shown on a stock chart.
Learning how to determine whether specific chart patterns & trends are generally bullish or bearish can help your analysis. Learning how to use penny stock charts can give you a tremendous edge if you apply it to your trading strategy. I won’t get into different patterns in this article, but if you’re interested, check out:
Trading Tip #4: Know About The Insiders
Just like news can become a catalyst, traders should look into which institutional investors and insiders are investing in or selling out of certain companies. This could act as an indicator of insider sentiment – how do they feel about their own companies? Significant insider holdings can suggest that a company’s executive leadership is well-managed and has a track record of solid performance. It isn’t just limited to management either. Generally speaking, extensive institutional holdings might signal certain things. So it pays to research filings like Form 4s, Schedule 13s, and other filing types. If you want to learn more about stock market filings, you can check out:
Trading Tip #5: There Will Always Be More Opportunities With Penny Stocks
This plays to the psychological aspect of trading. It’s tough to resist getting in on the action when you see a penny stock explode 400% in a single day. But if you don’t know how to identify chart patterns and have no idea why the stock is moving, you’re likely to lose more money than anything else. Whether you “miss” the trade, “sell early,” or do something that makes you feel like you’re on the sidelines, understand that the market offers opportunities daily. Sure, you missed today’s big move, but there will be another stock that captivates retail interest tomorrow more often than not. It may sound simple, but master the art of trader psychology, and you’ll be well-prepared for trading penny stocks.