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 have the patience to wait awhile before they break out. If you get the wrong entry then you can be waiting awhile for them to break out.
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Is Swing Trading Penny Stocks a Good Idea?
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 the world of penny stock trading is one of the more risky ways to trade. All types of investing or trading carries some risk with it, but penny stocks are typically seen as extra risky compared to blue chips or large caps.
The world of penny stocks is fraught with manipulators and pumpers that are looking to take advantage of traders; especially the new ones. Newsletters, chat rooms, and social media.
There are many promoters and scammers out there in the world of penny stocks who want you to buy their stock for one reason or another. Sometimes, because they have a ton of shares and they would love to sell them to 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 is going to require a solid trading strategy and finding good penny stocks to trade. .
Since a lot of these stocks trade for pennies, they’re not found on major exchanges like the New York Stock Exchange. The major exchanges de-list stocks that go under a dollar. You have to go 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 is basically telling you the highest price a buyer is willing to go and the lowest a seller is willing to sell.
When penny stocks are trading at low volume, the spread is typically wide. This can mean 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. What this is telling you is that 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 up trend. You don’t want to buy a penny stock that is being run into the ground on a chart.
Take a look at the chart below:
Here is a good example of a bearish penny stock that you would NOT want to trade. Long term monthly down trend, And they are also going into bankruptcy. Pay attention to 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 of them. But that doesn’t always mean you should by 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 then looking at the stocks that trade above a dollar may be the safest bet.
Do Your Own DD and Don’t Fall Into the Traps!
Never ever take someone’s word about a stock. Always do your own research before ever placing a trade. Just because someone is promising or expecting a huge return doesn’t mean its going to 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 than investing and you should be aware of the differences when swing 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 that the penny stock sector has more selling than buying happening? This is because there are people who are paid by companies to pump their stocks for them. It’s not illegal, but they do it anyways.
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 make money from a pump and dump scheme. In fact, if you’re well aware of 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 3 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 up to a couple weeks. Sometimes longer, as long as you’re in the green.
If you’re swing trading penny stocks that are clear pump and dumps, then holding overnight may be possible. 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.
Look for Patterns
Swing trading penny stocks is going to require learning the patterns. The charts don’t lie. If someone is telling you that a stock or sector doesn’t follow the charts, then run the other way.
The charts confirm pump and dumps. Head and shoulders patterns are a popular pattern to look for. Why? Because it’s known as the F you pattern. Which is what happens if you get caught at the end of it’s formation.
The importance of patterns, volume and the bid ask spread is going to your saving grace when swing trading penny stocks. Only trade the best set ups. Don’t listen to the advice of other people without doing your due diligence.
If you need more help, take our swing trading course.
