In the stock market, the quickest moving stocks are often times the most dangerous to play with. Trading these without any experience or strategy can be likened to financial suicide. Yet, despite the high level of risk on the line, these stocks are highly sought after especially by seasoned traders as their potential return is relatively high for such a short amount of time. Among these high risk - high reward stocks are what we call Penny Stocks.
Penny Stocks generally refer to a tier of listed companies that are priced below 5 php. These are stocks with very small market capitalization (usually 5 billion and below) and show lackluster and inconsistent earnings. As such, these stocks show little to no activity which makes their price charts very choppy and difficult to read.
However, from time to time, Penny Stocks do get played. When they do, you’ll see uncommon names reaching 20-30% in a few seconds or minutes. Since they have low market capitalization, they are relatively easy to be manipulated to generate volatile price swings. This high risk - high reward nature of Penny Stocks is what makes it very attractive to many thrill seeking traders.
A Pump and Dump Play
Penny Stock prices fall as fast as they rise. The high volatility coupled with huge spikes in demand allow these stocks to become profitable for a limited window of time. It takes a veteran eye to spot the right moment to execute a Penny Stock play. If you miss that opportunity then you might as well move on. Newbie traders often get tempted by these fast moves. They try to buy them for the Fear Of Missing Out. What happens is that they enter at the peak of the move only for the stock to quickly fall down trapping them at resistance levels. The smart money always win.
While Penny Stocks may prove to be an elusive creature to catch, there is however a method to the madness. Let us show you how to turn trash into treasure, using these two Penny Stock strategies:
1. The Ticker Play
The ticker play is mostly a game of chance. Executing this play demands the trader to fully monitor intraday ticker activity.
The picture above is a sample of a ticker. A Ticker Play will show in the ticker as successive streaks of buying activity on a particular stock. This points to unusual volume that will likely lead to an explosive burst in price.
What you want to see is a volume spike which would show as a quick successive buying activity in the ticker. You will see a stock name appear multiple times at this point. When this happens, the trader usually has a 8-10 second window to quickly look at the chart and make a decision to buy it at its current price. Waiting for a lower price range is impossible as a spike in buying volume would prompt traders to buy at higher price levels. This buying frenzy results to a quick price rally depending on how strong and sustainable the momentum is. After which, the price encounters heavy profit selling which pulls the price back to its previous level.
Pros:
If correctly executed, a ticker play will give you 10 -15% conservative gains
Ceiling plays are highly possible
Cons:
Late entries will leave you susceptible to fast selloffs
Very stressful for newbies
Needs real time monitoring and fast decision making
A strong background on volume and price action analysis is needed
2. Scalping
A scalping play is an intraday trade that is similar to a swing trade in terms of technique. The stark difference is that scalping utilizes intraday volatility to profit from highly volatile stocks. To do this, a trader picks a stock with a wide intraday price range that is trading with above average volume. Lower time frames are used (typically a 1 minute, 3 minute or a 5 minute chart) to be able to ride the intraday swings. It is important to remember that the higher the volatility is, the better the chances there are to execute a scalp multiple times.
Above is a 3 minute stock chart of a Penny Stock that underwent a substantial volume spike. As buying volume gained momentum, the stock rallied for 28% in a matter of minutes. A typical EMA9 momentum indicator and a MA20 indicator will show multiple entries for a quick Scalp. Each swing rallied for 10% which eventually ended when the price closed under the EMA9 line suggesting increased selling pressure.
This play relies more on price action than anything else. Usually, highly volatile stocks rise and fall multiple times within the day. If the range is wide enough (let's say 15% - 25%), then multiple entries and exits can be done as long as demand for the stock is strong.
Pros:
Quick movements allow for fast profits
Can be executed multiple times if the margin is wide and if the volatility is consistently high
Cons:
High risk of a price breakdown if intraday supports are broken
Very stressful for newbies
Needs real time monitoring and fast decision making
A strong background on volume and price action analysis is needed
We hope this post has helped you. To read more stock trade strategies and tips, check out the online learning module in this website. We are constantly updating content to better serve you. Happy investing!
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