4 Common Strategies For Day Trading Penny Stocks

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Out of all the various trading strategies out there, day trading penny stocks is probably one of the most profitable and risky.  In simple terms, day trading penny stock involves buying and selling a stock within one trading day.  In other words, you would start and end the day holding only cash with no open stock positions.  Intra-day trading is inherently risky yet when done correctly can also be extremely profitable.  Like all things, especially in the world of investing, the higher the risk the higher potential reward.

There are essentially three main attributes to look for in a penny stock trading candidate:

High Liquidity
If you’re going to be day trading a penny stock, you better be sure it is highly liquid, meaning it trades throughout the day with high volume.  Without high volume, the spread between the bid and ask price can be so wide, you won’t be able buy penny stocks at a competitive price and even if you manage to buy some stock and can easily get stuck with shares you simply can’t sell before the end of the trading day.

High Volatility
We’re often taught by investing experts to avoid highly volatile stocks but when you day trade penny stocks, this is exactly the type of stock you want.  Stocks that have wide daily trading ranges offer better opportunities for profits compared to those that trade flat.

High Quality
When day trading penny stocks, don’t trade junk.  Remember, you will be buying these stocks and holding them for a period of time, however short that might be.  As such, there’s always a chance you may be left holding shares after the close so you better pick stocks you wouldn’t mind holding to the next trading day.  There are gutsy traders that will trade just about any stock but I say why bother; there’s plenty of quality companies out there you can profit from, so why take on even more risk than you need to?

Once a few good penny stocks have been short listed, when trading penny stocks there are some basic strategies traders will typically use to help minimize risks and maximize gains:

Scalping
Scalping is probably one of the more popular strategies due to its simplicity.  With scalp trading you are essentially taking advantage of market inefficiencies with respect to the spread.  The gap between the bid and ask price (i.e. the spread) can narrow and widen rapidly throughout the day creating buying and selling opportunities for quick profits.  In order to scalp successfully, you’ll need access to Real Time Level II Quotes which is normally available from most penny stock brokerages.

Range Trading
With all other things being equal, stocks will often trade in a set trading range throughout the day.  With range trading your goal is to buy at the bottom of that range and sell near the top (or vice versa when shorting).  If implementing this strategy, look for stocks that appear to have a fairly consistent trading range from day to day.

Momentum or Trend Trading
Have you ever heard the phrase “the trend is your friend”?  Well, with trading penny stocks, identifying trends through technical analysis and buying and selling according to that trend, can prove to be very profitable. In basic terms, with trend trading, you buy a stock when it is trending up and sell as soon as it reverses that trend or conversely when shorting the stock you short sell it when trending down and cover your position at the point it starts to recover.

Real-time News Trading
Another common strategy used by traders is to buy penny stocks the moment good news is released and sell after the punch up or short the stock on negative news and buy back after the news has settled. This type of trading can be achieved through the use of a real-time news feed.

The rewards from online penny stock trading can be very great yet the stark reality is most penny stock day traders end up being unsuccessful so regardless of what strategy you decide to use, always try to limit your risk by using stop loss orders and never risk more than you can afford to lose.  In addition, day trading penny stocks should be limited to a small portion of your overall portfolio.

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1 comment so far ↓

#1 Dominik on 07.10.11 at 2:34 am

I really like this article but some penny stocks could be a good long term play when u buy at “basement prices”

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