Day traders are hunters of volatility which is why low float stocks are a favorite to trade. The result of volatility can lead to a large move in one direction. Low floaters are stocks that typically have a market capitalization of less than 20 million. This is the amount of shares that are able to be traded of the company. It’s the law of supply and demand. If there are a limited amount of shares to be traded and the demand is high then the volatility will increase.
- Low float stocks are highly volatile stocks that usually pump and dump
- Typically, stocks that are under 20 million are considered a low float stock
- Under 10 million is considered really low
- Penny stocks under $5 are the most popular momentum stocks to trade
- Small cap stocks up to $10 are also popularly traded
As you can see in the chart above $CLVS has been a hot mover on better than expected earnings. It is a very small float, under 2 million shares are publicly available to trade. When it it the 100SMA on the daily chart (yellow line) It pulled back over a dollar and closed red on the day. It was still above the 9EMA (daily blue line) so the momentum was STILL HOT! When low float stocks get a lot of volume they can move BIG!
What is float? Float is the number of shares available for trading of a particular stock. When a stock has a low float, it means there are a low number of shares to trade.
Hence the volatility that can occur with low floating stocks. Volatility is the bread and butter of day traders. In fact, Merriam Webster defines volatility as a tendency to change quickly and unpredictably.
In other words, small floats aren’t slow movers. They pump up, usually quickly; then dump when people take their profits. You need to learn how to trade them safely. The bid and the ask prices are often wide and move quickly. They feel chaotic at times when you trade them.
Never, ever attempt to trade low float stocks without a game plan. And if you are only scalping them, we recommend you trade these types of stocks using hot keys.
We talk about trading using risk management because this protects us. Things like having stop losses in place, profit targets and support and resistance mapped out.
All of this is very important when trading volatile stocks. However, stop losses on volatile stocks can be tricky. For example, a stock may trigger your stop only to turn around and rip.
As a result, you took a loss and missed out on the move of the rip. Therefore, keep that in mind when you’re trading volatile stocks.
Supply and Demand
In order to understand low floats better, we need to understand shares outstanding. That’s a little different than float but affects it immensely.
Shares outstanding refers to all the stocks in a company. Even stocks that are controlled by shareholders. Which aren’t apart of the shares traded daily by day traders. As a result, you can see just how many shares the company has. However, the float is going to be smaller because those are the available shares.
That can mean that a company can have a large amount of shares but the majority of those shares are controlled by shareholders and investors; leaving the rest to be traded by the retail trader, i.e. you and me.
That’s when supply and demand comes in. Supply and demand are an important part of trading. When a stock has high demand and little supply, you get the parabolic moves.
When a stock has high supply but little demand, price action isn’t great. Trading is all about supply and demand. Low float stocks are in high demand with small supply.
Pros and Cons
Supply and demand is a big benefit to low floats. That’s what brings the volatility.
When a stock has little supply and huge demand, you’re going to be fighting with other traders for a piece of the pie.
You’ve heard the saying “buy the rumor, sell the news.” That means that rumor and news is going to drive price. These are catalysts that will cause small caps to move.
As a result, that also makes it risky to trade. Why? Because of the huge price swings in either direction. It happens quickly which means you have to be ready and on top of things. No distractions.
That means both good and bad news is going to affect price. Also be aware that small cap stocks aren’t going to be established; which is why they are volatile. With low floats with high volume, you can see a stock move 5% in a one minute candle, easily. Up OR down.
How to Find Them
You can set your trading scanners to look for low float stocks that are moving. In fact, here at the Bullish Bears we’re big proponents of Trade Ideas.
Trade Ideas scans for low float stocks that are moving. As a result, you won’t miss out on the volatility of a play.
You can also customize scans to look for low float setups you like trading. Set alerts to make sure you don’t miss any potential moves also.
Stock scanners are tools available to traders as a way to weed out the noise. They filter thousands of stocks to find you the best setups for small cap stocks; or any other play you’re looking for.
Volume is extremely important to trading the stock market. Stock volume equals price action. For every buyer there’s a seller.
That ebb and flow drives price. Volume helps to determine the strength of price movement. In fact, volume can be one of the most important indicators in trading.
When price moves but there’s not much volume, that’s not a good sign. Instead, that’s a stock you potentially want to stay away from. When price moves and there’s a lot of volume, that gives validity to the move. This is especially true for small cap stocks. That means you need to make sure the volume matches the price movement before getting into the trade.
Technical Analysis and Patterns
When trading them you need to look at technical analysis as well as patterns. Just because it’s a low float doesn’t mean it’s going to be volatile. Or that you should place a trade.
Look at what the technicals are telling you. Where is support and resistance? Are the moving averages bullish or bearish? Is price overextended?
How about candlesticks? Are they bullish, bearish or indecisive? All of those factors can and should determine how you trade small cap stocks.
Trading using technical analysis and patterns are going to protect you based off rumor and news. Never trade a low float stock based off someone recommendation or a gut feeling.
What are the charts telling you? Let that be your guide to trading low floats. Take our online trading courses to learn more about trading low floaters.
How to Trade Low Float Stocks
- Here are a Few tips on how to trade low float stocks:
- Have a good penny stock scanner to find them
- Set filters on scanner to scan for stocks less than 20,000,000 float
- Look for gappers that are up pre-market at least 3%
- Search for stocks that have a news catalyst to make them move
- Narrow down watch list to a few stocks at open and plan your trade
- Watch for huge volume spikes
- Wait for pullbacks to enter
- Enter on a pullback in anticipation of hod break or wait for break and retest
- Keep your scanner running during market to scan for momentum plays
Low Float Stocks Final Thoughts
Low float stocks have great potential for big plays. Just keep in mind that it can be risky. Check charts, patterns and technical analysis to see if it’s worth the risk and reward. If you’re looking for help and guidance, our courses are a wealth of resources to get you going.
If you need more help, take our day trading course.
Frequently Asked Questions
- Float dramatically affects the price of a stock
- Low float stocks under 20 million are highly volatile
- They pump and dump very quickly
- Medium float between 50,000,000 to 100,000,00 pump and dump slower
- High float stocks over 100 million are less volatile. Less risk and less reward