Penny stocks are shares of small companies with low prices that offer high returns. These stocks are usually priced below $5 and traded in Over-The-Counter markets. They offer high-profit potential but also come with a lot of risk. Because these are small companies, trading volume is lower than New York Stock Exchange stocks. As a result, liquidity is low, and volatility is high. This means bigger profits and losses.
Penny stocks
At the same time, these companies have little financial history, increasing the risk factor. They are great for speculation. For experienced traders, it is a quick way to make high returns. However, they ensure to manage risk properly due to the risks involved.
Penny stocks are attractive for investors who want to participate more in active trading. The low liquidity and high volatility create short-term swings. These offer swing traders great trading opportunities.
Moreover, some of these companies might be undervalued because they are in the early stages of growth, allowing traders to catch the beginnings of massive trends. To swing trade penny stocks successfully, traders must focus on some key areas.
BROKER AND TRADING PLATFORM
The first major step is to pick the right trading platform. Because penny stocks are traded over the counter, traders must work with a broker that offers these markets. After finding such brokers, you must filter them based on the trading conditions they offer. These include commissions, fees, withdrawal charges, and execution speeds.
You must also be sure what minimum balance is required and if there are any short-selling restrictions. Once you know all this, look at the technical and fundamental analysis tools. The more tools there are, the better because they will give you a wider angle for analysis.
START SMALL
After picking a broker to work with, you must decide how much to start with. Since swing trading penny stocks can be risky due to the high volatility, it is advisable to start small. It would even be better to practice with paper trading before diving into the real market.
A small starting balance will give you enough room to make mistakes as you get used to the trading conditions. Moreover, it will give you time to acquire enough skills and experience. After trading for a while, with a small balance, you can gradually increase.
TECHNICAL ANALYSIS
Swing trading penny stocks will involve a lot of technical analysis. You must learn to identify patterns and read price action to catch swings. Additionally, learning to identify support and resistance levels is crucial. This way, you can enter the market when the price retests or breaks above or below these levels.
Technical analysis
The chart above shows the penny stock RIME. A close look at price action shows a strong resistance level at $1.24. A swing trader would wait for the price to break above this level, creating a nice opportunity for a bullish swing trade.
Indicators like moving averages can help you identify trending and ranging markets. In the chart above, the price keeps chopping through the moving average, indicating a sideways move that later led to a breakout.
To swing trade penny stocks, you must develop a clear strategy that shows the conditions for entering and exiting the market. The strategy can focus on breakouts or catching pullbacks at strong support and resistance levels. Regardless of the strategy, following it and cultivating discipline for good results is important.
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FUNDAMENTAL ANALYSIS
Another important part of analysis should focus on the fundamentals. Here, traders can focus on the company’s financials, management team, future plans, etc.
News releases
Moreover, you should pay attention to news releases like earnings, which show the company’s health. You should know when the company will report its earnings, as this could increase volatility, creating good trading opportunities.
Financials
Financials will give you a clear report of how the company has performed in the past. Here, you can take a look at the revenue and profit. You can also analyze how much debt the company has and its total earnings.
Relevant news
Finally, following news reports related to the company will keep you updated on any changes that might impact the penny stock’s price.
Fundamental analysis will give you a clear picture of where the company is headed. Poor health means you should stay away from it. On the other hand, great financials give you the green light to trade a penny stock.
SEEKING VALUE
A good technical and fundamental analyst can find diamonds in the rough. These are undervalued penny stocks with great financials and growth potential. Finding an undervalued company can create good opportunities for high returns. However, this requires intense analysis of both technical and fundamental data. You can focus on swing trading just one penny stock when you find such bargains.
RISK MANAGEMENT
Another major area of swing trading penny stocks is risk management. At the very beginning, it is important to decide how much you are willing to risk per trade. Traders can decide this based on their account balance, technical analysis, risk tolerance, and market volatility. After deciding how much you will risk per trade, you can use tools and techniques to ensure you follow through when trading.
For funded trading, for instance, with FTMO or Trade The Pool, you will decide how much to risk based on the guidelines and objectives.
The first is a stop loss. This a risk management tool that automatically closes a position that is losing. Depending on how much you are willing to risk and other factors, you can place a stop loss below or above your entry level to protect your capital in case the trade loses.
Another way to ensure you manage your losses and grow your account is using a risk-reward ratio. A risk-reward ratio will ensure that you always make more than you lose. For instance, if you decide on a risk of 1%, you can set your reward at 2%. This means an RR ratio of 1:2
MISTAKES TO AVOID
- Avoid rushing trades. Due to their volatile nature, penny stock prices can consolidate for long before moving in one direction.
- Avoid rushing for hot tips. Hot tips in the stock market can be many, and they can cause a lot of impulse trading. Before trading, ensure you have done your due diligence.
- Ignoring fundamentals. Technical analysis can seem more exciting than fundamental analysis. However, ignoring fundamentals can lead to massive losses.
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