Penny Stock Trading Strategies You Need to Know About

May
3, 2021

7 min read

This story originally appeared on PennyStocks

Do You Know These Strategies for Buying Penny Stocks?

Buying penny stocks is not easy. But, it can be if you have the right tools at your disposal. When starting to trade penny stocks, some investors quickly find themselves in the red. And without a commitment to education and dedication to learning, this will remain the case.

But, consider this. You wouldn’t perform an open heart surgery after reading a few articles on how to do it. While this may sound extreme, buying and selling penny stocks or any stocks for that matter is the same thing. 

So, when making a watchlist or even just glancing at some penny stocks to watch, it’s important to know what your strategy is. This goes beyond just researching how to trade penny stocks. Rather, there are some nuances that all investors should consider. 

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For one, penny stocks are highly volatile. Whether due to large speculation or simply the fact that they are stocks under $5, price fluctuations are very much commonplace. While this may seem scary at first, knowing how to capitalize on it is what makes certain traders profitable, and others not so much. 

In addition, traders need to understand their unique goals. Are you saving for a new house? Trying to make a living? Or are you working to bring in some extra income on the side? These questions can help to define whether short or long-term investments are better for you.

After taking an inward look, it could be time to start educating yourself on exactly how to trade. So, to help with this process, here are a few penny stock trading strategies that you need to know about. 

3 Penny Stock Trading Strategies to Utilize Daily 

1. Making a Penny Stock Watchlist 
2. Picking the Right Penny Stocks to Buy 
3. How to Take Profit With Penny Stocks 

Making a Penny Stock Watchlist 

Last week, we covered how to make a penny stock watchlist in an in-depth piece. However, to refresh those just now coming onto the scene, let’s give a brief overview. Building a proper watchlist involves three things. First, traders need to build an under $5 scanner. This can be done on a variety of platforms, but most tend to use ThinkorSwim. 

This is an all-in-one application made by TD Ameritrade. It allows for trading yes, but also the ability to build complex and concrete scanners. In the simplest of terms, traders should scan for stocks under $5 with a volume of over 1 million. This will give a list of a few hundred penny stocks. While the $5 part is self-explanatory, having a volume of over 1 million will help to ensure that there is enough liquidity to enter and exit a position. 

Those under the 500,000 range, for example, many not allow for swift buying and selling, therefore it could be more difficult to swing trade penny stocks. In addition, low volume will mean that a stock could jump and fall in price with little to no indicators. This could result in sizable losses incurred on a very quick timeframe. While making a scanner is a great idea, it is only one step in your trading journey. 

Picking the Right Penny Stocks to Buy 

Picking the right penny stocks to buy can be challenging. But, there are a few aspects that can make it easier. After compiling your list of penny stocks via a scanner, the next step is research. With the internet, anyone with a computer can find out everything there is to know about a given company.

First, what are the speculative factors impacting the company right now and in the near future? This could be a new product, an FDA approval, or the announcement of a quarterly earnings report. Now, there are more to consider, but these should help to indicate how speculation can impact a company’s share price. 

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The second aspect to consider is, what do a company’s fundamentals look like? While fundamentals can lead to speculation, the two are quite different from one another. Fundamentals are all of the baseline factors that impact a company. This includes revenue, EPS, profitability, fundraising, and anything similar to these.

Both speculation and fundamentals should be looked at with every penny stock you intend to buy. After doing so, you should be able to know exactly what a company looks like from an overall perspective. 

Lastly, is this stock right for you? Throughout this piece, we’ve covered how investing is an individual task. Because every stock is different, you need to make sure that a company aligns with your investing goals. For this reason, looking at how volatile it is (how often and how large prices fluctuate) can help to determine whether you should invest in the short or long term.

This can be calculated more thoroughly through a beta measurement. This is the overall measurement of a stock’s returns versus a control (usually the S&P 500). Over 1.00 usually means it is more volatile, while under 1.00 means the opposite. And, we also have to take into account the speculation that could impact the beta in the short term. With all of this in mind, picking the right penny stocks to watch can be simple. 

How to Take Profit With Penny Stocks 

Taking profit with penny stocks is a simple step, yet it is something that some investors forget to consider. Often, investors will enter into positions due to FOMO (fear of missing out). This usually occurs after a security has hit a major high, such as a 50% gain in a single gain for example. However, after large gains, a natural correction usually ensues, thus resulting in losses. 

So, in short, FOMO is a bad strategy, and something to stay away from. This mostly aligns with the psychological needs of making a profit with penny stocks. However, in fiscal terms, there are a few strategies to consider. 

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The most popular is usually a gradual profit-taking strategy. Let’s give an example. First, an investor would set a price target. Let’s say a stock is at $1 and an investor thinks it will go up to $4. $4 would therefore be the target price. On the way to the $4 mark, investors would take profit in increments. 

First, the stock could hit $3, and an investor would sell 25% of their position. Second, the stock could move to $3.50, where an investor would sell 50% of their position. And lastly, the stock could hit $4, where one would then sell the remaining 25%.

This is a common strategy used to ensure that every trade could be a winning trade. In addition, it also helps to ensure that losses could remain nominal. While there are other strategies to taking profit, this is usually a simple and straightforward way to feel confident in all of your trades. 

3 Penny Stocks to Watch

1. Seanergy Maritime Holdings Corp. (NASDAQ: SHIP)
2. Galiano Gold Inc. (NYSEAMERICAN: GAU)
3. Peabody Energy Corp. (NYSE: BTU)

Are Penny Stocks Right For You?

At the end of the day, investors need to pick the best stocks to buy for their portfolio. If you’re not comfortable with large ups and downs, penny stocks may not be right for you. However, if you are, there are plenty of opportunities to be had.

While this is not a complete list of how to buy and sell penny stocks, it should help to point you in the right direction. Considering this, are penny stocks right for you?