Penny stocks, also called micro caps or cheap stocks, usually represent companies whose market capitalization is less than $300 million and whose stock price is below $5. These are risky assets, but they can be great options for traders with limited trading capital.
Trading penny stocks isn’t easy, but it can be very rewarding, and you potentially make a living out of this activity if you do it right. So, if you’re just starting to trade penny stocks, here are a few tips to help you get the most out of your trading experience.
Really understand what penny stocks are
Knowing what you’re doing might seem obvious, but many traders jump into the trading world without really knowing what trading is, how it works, and how they can make money out of it.
If you really want to get into penny stocks, you should know what they are, the risks involved, and understand how to trade them.
Pick a trading strategy and stick to it
One of the most costly mistakes penny stock traders make is trading without a real strategy, simply by following their gut and intuition. If you want to be successful over time, you need to first determine your trader profile to pick an appropriate trading strategy, and stick to it.
Mostly depending on your risk tolerance, your trading capital, and your financial goals, you might decide to use aggressive strategies like scalping and day trading, or less time-consuming strategies like swing trading.
Focus on stocks with strong volume
If you want to quickly get in and out the market to take advantage of the best market opportunities without really influencing the stock price, you have to focus on highly liquid stocks with strong trading volume. After all, if there is no volume, there’s nobody you can trade with!
High volume stocks tend to see the biggest potential upward/downward price movements. Monitor surges in buying or selling, so then you can take advantage of this volatility.
Follow the right catalysts
A catalyst can be defined as an event, a speech, an announcement, a statistic, or basically anything, which triggers a significant price change in an asset’s value. Very often, catalysts are unexpected and they cause market participants to re-evaluate the given asset’s growth prospects, which can influence its price.
Each activity sector has its own catalysts. If you invest in the biotech sector, for instance, you should monitor drug approvals by the FDA. If you invest in cannabis stocks, you should monitor any change in the regulation of this industry in big markets, like the United States.
There are some catalysts that are common to many companies – the earnings season, new contract announcements, and spending programs from the government are just a few.
Use money management rules to protect your trading capital
You should apply strict money management rules when trading penny stocks to protect your capital, in case prices move against you. Your money and risk management rules will depend on your level of risk tolerance and should be written down in your trading plan.
Using stop-loss orders, adapting the size of your trading position, and changing the level of leverage you’re using are among the most useful tools in managing your risks when trading penny stocks.