Shorting penny stocks is a very popular trading strategy with small cap stocks. It allows you the ability 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 price up and the bears wait on the other end to short the reversals back down to support levels. It’s important to have a good shorting broker like SpeedTrader, Interactive Brokers, or Centerpoint to get you shares to borrow. Watch our video on shorting penny stocks.
A risky but lucrative style of trading is shorting penny stocks. Penny stocks are popular because they are cheap; while allowing traders to take large positions.
It’s important to apply proper risk management and trade safely with penny stock trading strategies. The majority of traders that start out are learning how to invest in the stock market with little money. Hence the attraction of penny stocks.
Trading is risky but penny stock trading is even more so. These stocks aren’t regulated and are susceptible to manipulation and pumpers. It’s important to go in with your eyes wide open and be smart about trading them.
What Does Shorting Penny Stocks Mean?
- Shorting is when you borrow shares from your broker and sell them.
- Then when price falls you buy them back and give them back to your broker.
- You get to keep the difference.
- In essence, you’re making money without ever owning the shares.
You can go long in penny stocks as well as 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. Shorting penny stocks that aren’t the super cheap ones is probably going to be the easier way to do it. They have a little more volatility.
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 you’re shorting penny stocks having a broker that can find shares is necessary. There are many brokers that don’t allow shorting of stocks under $5. Hence the importance of having a broker that does.
You’re betting a stock will go down. When you go to short with your broker, they have to have customers that 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.
Do your research on different brokers such as Interactive Brokers. See if they have penny stock trading.
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 9 times out of 10 they’re not.
They’re usually someone who’s position isn’t doing well so they need your help to get out. They promise riches and once you’re in they get out. Usually leaving you to hold the bag.
Never take someone at their word. Do your own research. Look at the news, the charts and the patterns. They don’t lie. When shorting penny stocks you can definitely 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 to good to be true, it usually is. Do your due diligence. It’ll save your brokerage account.
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 price starts to move back up.
Japanese candlesticks patterns are going to be your saving grace when shorting penny stocks. It’s that way whether you’re day trading or swing trading.
Candlesticks by themselves tell a story. When you group them together they form patterns. These patterns give a bigger picture on direction and trader sentiment.
Head and shoulders patterns are popular especially with penny stocks. These are perfect patterns for shorting penny stocks. The small two and three candlesticks patterns are going to help also.
Tweezer top patterns as well as shooting star patterns tell you of impending short plays. There are many more where that came from too.
Learn the different patterns and how to trade them by taking our candlesticks reversals course. You won’t need to rely on anyone else to tell you when to get in and out.
Shorting Penny Stocks Technical Indicators
Technical indicators are also helpful but are nothing without candlesticks and patterns. You need both to work together. Shorting penny stocks means you’re probably going to be in and out pretty quickly. Take our day trading course.
You can couple patterns and indicators such as moving average lines. The VWAP trading strategy is a popular one as it also doubles as support and resistance.
If a candlesticks breaks below VWAP and can’t get above it, it’s a key resistance level. You can short 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.
Bottom Line on Shorting Penny Stocks
Shorting penny stocks is risky. That’s why knowing patterns is so important. Never listen to other people telling you when to buy and sell. Do you’re own research and make your own informed choice.
It’s going to take effort and time. You’ll need to study, practice and have stock market training. Then you can make trades confidently and successfully.