Demystifying Penny Stocks: How to Stop Betting and Start Trading

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When it comes to trading penny stocks, there are better ways than choosing a random trending ticker and betting on it. There are several effective ways to select the penny stocks with the best opportunities to perform well on the trading floor. Therefore you must learn how to screen them effectively so that you pick the right one.

You can use penny stock charts and screeners offered by brokers, or you can devise your own plans. These are some of the effective methods to identify profitable stocks from charts or screeners. You can use these methods to stop betting randomly and start penny stock trading intelligently.

Search for Unusual Volume

You should try and identify the stocks that have above-average or unusual volume. That way, you will be following the money because irregular volume usually means there is a catalyst event associated with it. You may find that some companies will show up with an unusual volume even when there is no news associated with them. 

That means there could be some industry-related news that could have affected the entire sector. For example, most penny stocks related to cannabis shot up when marijuana became legal in Canada.

Even though most of these companies did not attest it to their own use, the entire industry moved positively. So try to find the penny stocks with above-average volume to earn more.

Look for New Highs or Lows

Consider the daily range while looking at a penny stock chart, especially the daily highs and lows. That way, you may be able to spot new bullish trading opportunities depending on the market momentum. There are specific reasons behind the rising stock.

So if you notice relative volume building, you can probably bet on the stock’s next move. It may not be a full-proof method, but many experienced traders try to spot the new highs or lows on a day and then use them as pivot points to determine the buying price.

For example, when a penny stock reaches the first high, some traders wait in anticipation of the pullback before buying. That is because the penny stock will probably bounce up after pulling back if there is strong momentum. Therefore, you can get a better cost average than the high price by waiting for the opportune moment.

The same applies to daily lows when you can use the strategy to deal with the downtrend. So wait and watch if there is a larger buying volume coming in once the stock reaches a new low, as it can be as profitable as buying a stock in a bull run.

Find Price Gaps

Penny stocks with price gaps can also present good opportunities to invest. A gap occurs when a penny stock opens at a price that is significantly higher or lower than its closing price in the previous period. That means if there is a gap of $ 0.3, it makes no real difference. But if you notice a gap of $ 0.50, it is time to take action. 

Gaps are usually the result of certain events that can create positive or negative sentiments for the company. Just like an irregular volume, a gap can be caused by the industry. For example, penny stocks for oil and natural gas companies had huge gaps when there was an oil spillage in the ocean.

Long-term oil traders took advantage of this opportunity to purchase penny stocks at significantly lower prices. However, note that a gap does not always present an opportunity.

For example, a lower gap could mean that investors have lost confidence in the company and dumping their shares, which means the prices can go down further. You may need to learn some of the stock trading fundamentals to understand if you can benefit from a gap or not.

Dig Deeper

Monitoring the aspects mentioned above on stock charts can get you started with a list of ideal penny stocks. But if you want to segregate the probable ones from the real winners, you will have to dig a little deeper.

It will enable you to understand the factors that are creating irregular volume, new highs/lows, or gaps. These are some of the ways to find out more about prospective Penny stocks.

Check the News

Check to see if there is any company or industry-related news responsible for unusual penny stock volume or prices. For instance, a federal law approval or a business merger can be responsible for the bullish market. However, if you do not find any direct catalyst to move the penny stocks, it may be speculative.

Sometimes penny stocks that have not moved in a while may receive a sympathy trade, which can create speculation but will not be enough to result in a lasting bullish trend. Remember that you must find penny stocks with a strong catalyst creating the trends.

Look for High Volume

Volume can be the most important factor to judge penny stocks. The volume makes it easy for traders to buy or sell trades easily at desired prices. If you notice a higher than average volume for a penny stock, it is always a good thing. It means that there is a growing interest in the company from investors that can compound over time.

Judge High/Low Floats Carefully

Penny stock float means the number of shares available to trade and can be a blessing or a curse. A higher number of floats means that the stock will take time to move in either direction. A low float can be the perfect opportunity to make a hundred or thousand percent profit, but it comes with higher risks. So judge the float carefully before trading.

When you are trading penny stocks, the goal should be to make consistent profits using proper strategy and planning. If you aim for the fences all the time, you will probably lose more than you gain. But if you want to make steady money instead of winning the lottery, you can utilize some of these tips.

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The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur.

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