Day traders are volatile hunters, so 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 number of shares that the company can trade. It’s the law of supply and demand. If there is a limited number of shares to be traded and the demand is high, then the volatility will increase.
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 hit 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, there are fewer shares to trade.
Hence the volatility that can occur with low floating stocks. Volatility is the bread and butter of day traders. 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. It would be best if you learned 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.
Only attempt to trade low float stocks with a game plan. And if you are only scalping them, we recommend you trade these stocks using hotkeys.
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
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 shareholders control. Which aren’t a part of the shares traded daily by day traders. As a result, you can see just how many shares the company has. However, the float will be smaller because those are the available shares.
That can mean that a company can have many shares, but shareholders and investors control most of those shares, leaving the rest to be traded by the retail trader, i.e., you and me.
That’s when supply and demand come in. Supply and demand are an important part of trading. You get the parabolic moves when a stock has high demand and little supply.
Price action could be better when a stock has a high supply but little demand. Trading is all about supply and demand. Low float stocks are in high demand with a small supply.
Pros and Cons of Low Float Stocks
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 will 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 rumors and news are going to drive prices. 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, so you must be ready and on top of things. No distractions.
That means both good and bad news is going to affect the 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 easily see a stock move 5% in a one-minute candle. Up OR down.
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How to Find Low Float Stocks
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 for low float setups you like trading. Set alerts to make sure you don’t miss any potential moves.
Stock scanners are tools available to traders to weed out the noise. They filter thousands of stocks to find 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. Volume can be one of the most important indicators in trading.
When the 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 the price moves, and there’s a lot of volumes, that gives validity to the move. This is especially true for small-cap stocks. You must ensure the volume matches the price movement before entering the trade.
Technical Analysis and Patterns
When trading them, you need to look at technical analysis and patterns. Just because it’s a low float doesn’t mean it will 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 the price overextended?
How about candlesticks? Are they bullish, bearish, or indecisive? Those factors can and should determine how you trade small-cap stocks.
Trading using technical analysis and patterns will protect you based on rumors and news. Never trade a low-float stock based on someone’s recommendation or a gut feeling.
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 the 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 your 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 a break or wait for a break and retest
- Keep your scanner running during the market to scan for momentum plays
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
A low-float stock is good for day traders who want to trade highly volatile stocks. They are the most popular stocks to trade among momentum traders looking to scalp stocks in less than a minute and make good gains. They are popular with day traders looking to make $1,000+ daily trading. You should make sure there is a reason to buy them, meaning a catalyst. Did they have earnings? An FDA approval? News? Find a reason that traders want to trade this stock today!
The easiest and quickest way to know if a stock has a low float is to use a stock scanner and set up a filter that immediately tells you the float. Other ways to check a stock's float is to use Yahoo Finance or do a quick Google search.
- 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