Swing trading penny stocks can be a very profitable trading strategy. It involves buying small-cap stocks and holding them for weeks up to several months. While this is a very lucrative and popular strategy, it can also be risky if not done right. You need to purchase these stocks at support levels and be patient to wait before they break out. If you get the wrong entry, you can wait a while for them to break out.
Swing Trading Penny Stocks Introduction
Is swing trading penny stocks a good trading strategy? This is a question traders may be asking themselves before entering into a trade. Penny stocks are attractive to traders, especially new traders. They are inexpensive to buy. You grab a couple thousand shares worth for a hundred bucks or so.
You’re grinning ear to ear about the gains you’ll potentially make if it goes to the moon. Hence, their appeal among new and old traders alike. Whatever your opinion may be, the fact is that the world of penny stock trading is one of the riskier ways to trade. All types of investing or trading carry some risk, but penny stocks are typically seen as extra risky compared to blue chips or large caps.
Penny Stock Promoters
The world of penny stocks is fraught with manipulators and pumpers hoping to take advantage of traders, especially by new means: newsletters, chat rooms, and social media.
Many promoters and scammers in the world of penny stocks want you to buy their stock for one reason or another. Sometimes, because they have a ton of shares, they would love to sell them to you. Have you messed up, right? It is!
Don’t let that scare you off completely. It can be done safely and intelligently. You can minimize risk and lower your exposure to risk if you know what you’re doing. That’s part of being a trader.
Swing-trading penny stocks will require a solid trading strategy and finding good ones to trade.
Since many of these stocks trade for pennies, they’re not found on major exchanges like the New York Stock Exchange. The major exchanges delist stocks that go under a dollar. You have to go to the pink sheet or OTC to trade them.
These are just different types of exchanges where these stocks are listed.
Bid vs the Ask and Volume
An issue you may find when trading penny stocks is the large bid-ask spread. The bid-ask spread tells you the highest price a buyer is willing to pay and the lowest a seller is willing to accept.
When penny stocks are trading at low volume, the spread is typically wide. This can mean that a lot of times when you buy at the ask price, you’re immediately in the red, because the spread is so wide, and the next buyer may lower his price, and the seller may lower his price, chasing the bidder. When volume is low, this is common.
The larger the spread is, the less liquid the stock. When a stock isn’t liquid, it’s not moving as well. This particular stock isn’t really being traded and has no volume.
Large bid-ask spreads make market orders fill at prices that you don’t necessarily want. Sometimes you may have to swing trade penny stocks without wanting to. Look at the volume and bid-ask spread before placing a penny stock trade.
Where Can I Find Safe Penny Stocks to Trade?
Any of the penny stock trading strategies you should employ should revolve around finding good penny stocks. What constitutes a good penny stock? Typically, a popular one that doesn’t have a massive amount of shares outstanding has lots of volume. Also, it should have good, improving fundamentals. The chart should have a long-term or medium-term trend. You don’t want to buy a penny stock being run into the ground on a chart.
Take a look at the chart below:
Swing Trading Penny Stocks Example
Here is a good example of a bearish penny stock you would NOT want to trade. A long-term monthly downtrend, and they are also going into bankruptcy. Pay attention to the news, earnings, guidance, and other forward-looking catalysts that could hurt your swing trade.
Since penny stocks trade so cheaply, you can buy large quantities. But that doesn’t always mean you should buy more. When you hear someone building a strategy around how many shares they can own and how rich they will be when it goes back to a dollar – that should be a red flag.
If you’re swing trading penny stocks, looking at the stocks that trade above a dollar may be the safest bet.
Do Your Own DD
Never take someone’s word about a stock. Always do your research before ever placing a trade. Just because someone is promising or expecting a huge return doesn’t mean it will happen.
If a story sounds too good to be true, it usually is. Look for a respectable trading company if you’re looking for watch lists or data. Newsletters and mailing lists are the breeding grounds of manipulators and pumpers, typically.
Trading is very different from investing, and you should know the differences when swinging trading penny stocks. It’s risky to hold these stocks after their momentum has left.
Watch Out for the Pump and Dump
Did you know the penny stock sector has more selling than buying happening? This is because there are people whose companies pay to pump their stocks for them. It’s not illegal, but they do it anyway.
These manipulators aren’t making money by trading the stocks they’re trying to get you to buy. Instead, they make their money from being paid to get you to place the trade. They get paid to advertise the stock.
That’s not to say you can’t profit from a pump-and-dump scheme. If you know what it is, you can take advantage. A typical pump and dump is usually a 2 to 3-day pump followed by a dump. In the penny stock trading industry, this is known as the three-day rule…after three days, sometimes 4, there is a big dump of profit taking.
This isn’t the case 100% of the time, although it is the most common pattern. What is swing trading? It’s holding a stock overnight for up to a couple of weeks, sometimes longer, as long as you’re in the green.
Holding overnight may be possible if you’re swing trading penny stocks that are clear pump and dumps. However, it’s also super risky. Set a stop loss so if it does drop, you’re not out a lot of money and not becoming a huge bag holder.
Final Thoughts on Swing Trading Penny Stocks
Swing trading penny stocks is going to require learning the patterns. The charts don’t lie. If someone tells you that a stock or sector doesn’t follow the charts, run the other way.
The charts confirm pumps and dumps. Head and shoulders patterns are a popular pattern to look for. Why? Because it’s known as the F you pattern. This happens if you get caught at the end of its formation.
The importance of patterns, volume, and the bid-ask spread will be your saving grace when swing trading penny stocks. Only trade the best setups. Don’t listen to other people’s advice without doing your due diligence.
