Shorting penny stocks is a very popular trading strategy with small-cap stocks. It allows you to make money as the price of a stock falls. This is why there’s so much volatility with low floaters at the open. It’s the battle between the longs and shorts, creating a tug of war. The bulls push the price up, and the bears wait on the other end to short the reversals back down to support levels and then cover their positions. It’s important to have a good shorting broker like SpeedTrader, Interactive Brokers, or Centerpoint to get you shares to borrow.
You can go long in penny stocks and shorting penny stocks—that way, you can make money on the pump and the dump. When people think of penny stocks, they think of the ones that are cheaper than pennies. However, if a stock is under $5, it’s considered a penny stock.
Volatility is very important when trading any stock. That makes the price movement head up and down. Without volatility, you can’t trade successfully or quickly.
Broker Is Important
When shorting penny stocks, having a broker that can find shares is necessary. Many brokers don’t allow shorting of stocks under $5. Hence, it is important to have a broker that does this.
You’re betting a stock will go down. When you go to short with your broker, they have to have customers who own the stock you want to short. If there isn’t a customer that owns those shares, you won’t be able to short it.
Beware of the Pumper
Penny stocks are full of pumpers. Always be careful when someone is promising big things. There’s always a possibility they’re correct, but nine times out of 10, they’re not.
They’re usually someone whose position isn’t doing well, so they need your help to get out. They promise riches, and once you’re in, they get out. They are usually leaving you to hold the bag.
Never take someone at their word. Do your research. Look at the news, the charts, and the patterns. They don’t lie. When shorting penny stocks, you can take advantage of the dump you know is coming.
That’s why charts and patterns are the foundation of trading. They save you from the manipulation of pumpers and allow you to capitalize on moves.
If something sounds too good to be true, it usually is. Do your due diligence. It’ll save your brokerage account.
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Is It Illegal to Short Sell Penny Stocks?
Shorting penny stocks is not illegal. It’s a way to make money when a stock’s prices are declining, but borrowing shares from a broker and covering your position when the price starts to move back up.
Head and shoulders patterns are popular especially with penny stocks. These are perfect patterns for shorting penny stocks. The small two- and three-candlestick patterns are also going to help.
Tweezer top patterns and shooting star patterns tell you of impending short plays. There are many more where that came from, too.
Technical indicators are also helpful but are nothing without candlesticks and patterns. You need both to work together. Shorting penny stocks means you’ll probably be in and out pretty quickly.
You can couple patterns and indicators, such as moving average lines. The VWAP trading strategy is popular as it doubles as support and resistance.
If a candlestick breaks below VWAP and can’t get above it, it’s a key resistance level. You can short the price down. You hear more often then not buy at support sell at resistance.
Shorting penny stocks is the opposite. You want to sell at resistance and buy at support. Candlesticks patterns and technical indicators all help with that.
Final Thoughts: Shorting Penny Stocks
Shorting is risky. That’s why knowing patterns is so important. Never listen to other people telling you when to buy and sell. Do your research and make your own informed trading decisions.
It’s going to take effort and time. You’ll need to study and practice to get comfortable shorting penny stocks.
If you need more help, take our day trading course.