A lot has been written about penny stocks. Perhaps, you have heard stories of people who made a 100% return on their money within minutes trading these stocks. Perhaps, you have also heard stories of traders who lost their entire investment trading the same stocks. A good example is a person who trended last year after a trade went wrong. He opened a short position on a pharmaceutical company when going for a meeting. He left the trade open without a stop loss. A few minutes later, he had a negative balance. The company announced that it would be bought which made the shares soar. His broker did not have a negative balance protection. These things happen every day. People make and lose money. This article highlights a few ways of trading the most promising penny stocks in the market.
Come up with a list of undervalued penny stocks
There are thousands of penny stocks in both large exchanges and the over the counter (OTC) markets. No one can trade all these companies. In fact, people who pretend to trade hundreds of companies at once end up failing. It is better to be an expert on a single than a jack of all trades. In many cases, the people who pretend to know everything don’t know anything at all. The best way is to come up with a small list of companies that you want to focus on.
The companies you identify should be in an industry that you like. If your favorite industry is pharmaceuticals, you should find companies in this sector. After this, you should look at companies that are undervalued and those that have a potential. For this, you should aim to buy companies listed in the large exchanges like NASDAQ and NYSE. This is because these companies are well-regulated. In these companies, you can find the most promising penny stocks if you do your research well.
Qualities of a good list of small cap stocks
As stated above, having a list of small cap stocks that you will be trading is very important. Having the list will simplify your trading. In fact, traders who have a small list of companies to trade are often more successful than those who trade different companies every day. The companies you select should have a number of qualities. One, they should be listed in the major exchanges. According to the Securities Exchange Commission, a penny stock is a company that trades for less than $5 a share. These companies are listed in the OTC market and the large exchanges like the NYSE. The benefit of trading the companies listed in the large exchanges is that you can find the information about them.
The companies in your list should be in the industry you have an interest in. You simply want to be an expert in the companies you want to trade in. Therefore, if you have no interest in technology companies, there is no need for you to trade companies in the sector. Doing this is counterproductive to you. Instead, your list should be in the companies and industries that you love.
The companies need to be stable in nature. While many small cap stocks usually have some financial problems, the fact is that you want to trade with the most promising penny stocks. These are companies which will soon breakout and either come back to profitability or be acquired.
Technical analysis of stocks
After coming up with a good penny stock list, the next step is to conduct technical analysis. Technical analysis allows a trader to use some mathematical formula to predict the future movements of a company. This strategy is particularly important because in penny stocks, traders don’t necessarily look at the fundamentals of the companies. This is because these companies have limited disclosure requirements. As such, it cannot help you identify the most promising penny stocks.
There are many types of technical indicators that a trader can use. They include trend indicators volume, and oscillators. Trend indicators tell traders when a trend is starting to form and whether it is a strong trend or not. They include indicators like moving average, parabolic SAR, Bollinger bands, and standard deviation among others. Though they are derived from complex mathematical formulas, one does not need to learn these formulas. You just need to apply the indicators and learn.
Oscillators on the other hand tell a trader whether a stock has been overbought or oversold. When a stock is oversold, it is an indicator to buy and vice versa. Some of these indicators are the relative strength index (RSI), stochastic, MACD and the relative vigor index (RVI). The volume indicators on the other hand tell an indicator how traders are buying and selling a stock. They include Acceleration, distribution, money flow, and on balance volume among others.
Automated Stock Trading
It is also possible for a person to trade penny stocks automatically. This however is recommended for traders who are experienced in algorithmic trading and some coding. In the past, algorithmic trading was a reserve to people who had experience in IT and software development. Today however, things have changed. Brokers are providing their traders tools to simplify this type of trading by introducing drag and drop capabilities.
To do this, you need to have a good understanding of technical analysis. You also need to have a number of indicators that you like. Then, you should come up with formulas and parameters to develop your code. After developing the code, you should back-test it to see how it performs. Finally, you should implement it on your trading platform and observe how it performs. It is also important to keep on correcting the system when you see it deviating. It should take you some time before you use the system.
Another option is to buy algorithms from developers. There are many developers who sell their own algorithms. This is an easy way to become successful. However, you should take time to review the system before you buy it. You should also understand that no system is usually a 100% accurate. You will occasionally make some losses. Your goal should be to minimize your losses by having a stop loss where necessary. Another problem with algorithms is that they can’t help you identify the most promising penny stocks. This is because they are not programed to look at the company’s fundamentals.