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Consistently trading penny stocks profitably may seem like a mystery to most newbies who have decided to trade them. But it is definitely not rocket science, and all it takes is the right tools and knowledge.
So if you have decided to become a penny stock trader and looking for some directions, you have come to the right place. We will discuss some of the smartest and safest steps of finding the right penny stocks.
But before we begin, let us make sure that you understand what penny stocks are. The term ‘penny stocks’ refers to stocks with a trading value of less than $5 per share. These shares are usually offered by companies that are still in the development stage or producing a few products.
You may find that some penny stocks are sold on major stock exchanges like NASDAQ or New York Stock Exchange, but the majority of them trade at the over-the-counter (OTC) Exchanges. The primary reason is that OTC exchanges do not follow stringent stock exchange rules, which makes it easier for smaller companies to get listed.
That is why the risks of fraudulent activities are also higher, which scares most people. However, there are plenty of opportunities to benefit from price spikes and earn big from penny stocks. So let us discuss how to find the right penny stocks to trade.
Open a Trading Account
The first step to trade with penny stocks is to open a trading account that works with penny stocks. It will help you learn the basics of trading when you open an account with a penny stock brokerage. Once you feel more confident about your trading capabilities, you can switch to an advanced broker that specializes in specific types of stocks.
You will also need to set up a trading platform that includes additional equipment and software. Apart from the equipment and software, you will also need a lot of self-discipline and a full-proof strategy.
Set Up a Penny Stock Scanner
You will find that thousands of penny stocks offer their shares every day in the United States. If you want to narrow them down somehow, you have to know how to identify the right ones with potential amidst the sea of penny stocks.
One of the best ways is to use a penny stock scanner that can quickly scan through all the penny stocks and choose the ones that fit your criteria according to your trading preferences. You will have to build your own set of criteria to sort out the profitable penny stocks.
Some of the usual things that traders look for include spikes in volatility, news, changes in volume, and previous significant moves. The best stock scanners usually offer a free trial period so that you can judge their utility and see if they fit your bill.
Analyze Stock Patterns
The real job starts after you have narrowed down the stock choices to a shorter list that seems more manageable. You will have to look for the trades with the most favorable risk factors are the ones that can allow you to invest a small amount of money with large potential gains.
If you want to find those trades, you will have to analyze the stock charts and look for the right patterns. You can check the price and volume patterns on stock charts t understand the factors driving the stocks.
As you gain more experience in reading charts efficiently, you will begin to understand how traders react to various key levels. Understanding chart patterns will enable you to build a trading strategy so you can choose the correct entry points and find stocks that can meet your expectations.
Monitor Technical Indicators
Every penny stock trader has a different theory on how to choose the right penny stocks. Most of them follow stock charts to identify patterns, as we discussed in the last point. But if you want to build a better system to trade, you should use technical indicators that can provide further insights from the stock charts.
The technical indicators will manipulate the price and volume data to show you additional information, like stock momentum, recent spikes, lack of volatility, and vulnerabilities. It may sound complex, but you can deduce the details from simple things like the average stock price over a particular time ( also called the moving average).
Or you can check the OBV indicator that shows the differences in trade volumes between up days and down days. Every stock trader has a set of favorite indicators, so try using as many as you can to find the ones that work best for you.
Check the News
Every trader checks the news for catalysts that can potentially affect stock prices. For example, a new company may have received funding from investors, resulting in a stock price spike. Or a technology company may have created something that can prove to be the next-generation tech causing a sudden jump in the stock prices.
Sometimes the news can go the other way as well, resulting in a plummet in the prices. These news catalysts can tell you when to jump in or out of trades to maximize your profit. The action is usually short-lived, so you have to react really fast to take advantage of the situation. You can also use the news to identify trends that can make the stocks go either way.
An explosion in penny stock prices is usually preceded by a spark. So you have to learn how to identify those sparks instead of trying to guess what can cause the stock prices to explode. In other words, you have to look for the signs and react quickly when you see them. These methods can help you identify those sparks so you do not have to wait and anticipate them.