Keys to Becoming an Effective Penny Stock Trader

Keys to Becoming an Effective Penny Stock Trader

Penny stock trading can be an incredibly lucrative form of trading.  However, being a penny stock trader is not as simple as finding a cheap stock and making a trade.  If you want to achieve good returns on your account then there are a number of keys to keep in mind.

Trade penny stocks with good volume.  There are penny stocks that do not trade many shares on a daily basis.  This can cause a problem for the active trader.  It makes it more difficult to get into a position or to get out of a position without effecting the price.  Since penny stocks are cheaper than the average stock penny stock traders have a tendency to buy more shares.   If you are holding 5000 shares of a company that only trades 15,000 shares on an average day, you will move the market against you if you need to exit your position.  Try to trade stocks with at least 500,000 average volume.  The higher the volume the better.

Stay away from scheduled news events.  More often than not the news for penny stocks is not too great.  Although there are mammoth gains to be had if you guess in the right direction there are tremendous losses to be incurred if you are wrong.  As a result, I would not hold a position going into their earnings announcement.  The risk is too great.  There are many other opportunities to take advantage of during the time between earnings announcements.  The only exception to this may be in the biotech arena.  If a penny stock company is waiting on drug approval you may want to take a chance since this can result in an overnight double or more.  I have seen stocks open the next day up 700% on such announcements.  However, keep in mind that if the announcement is not favorable then the stock is likely to get cut in half or worse.

Another key for the penny stock trader is to buy stocks that have pulled back after good news.  Often you are not in a penny stock at the time it makes a big move.  But if you will wait you will often get a second chance.  If there was a big move then many traders will begin to take profits.  This will push the stock lower.  As it continues to fall others will want to at least get something out of the big move so they will sell as well.  Many times this will bring the stock very near to wear it began the move in the first place.  This provides you with a second chance to enter a trade for the next leg up.

If you can put these three keys to work in your daily trading it will go a long way toward making you a more effective penny stock trader.