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Methods and Strategies of Penny Stock Trading

Updated on 2012-09-15 by Guest







Any trader worth his salt uses a solid strategy as a basis for his trading decisions. The same can be said for penny stock trading; to get ahead, you need to learn and understand the methods and strategies of penny stock trading. After all, the difference of success and failure in trading could all boil down to how solid the strategy is and how well you can stick to the strategy in the face of mounting pressure.


What is a Penny Stock?

Much has been said about penny stocks but the thing is; most people’s definition of penny stocks varies. But to use Securities and Exchange Commission’s (SEC) definition of those terms; a penny stock refers to those equities that are trading below $5.

While many traders and analysts follow SEC’s definition of a penny stock, there are some whose definition of penny stocks are limited to those equities trading under $1 mark. Most of these stocks are not found on major exchanges; these are traded on over the counter bulletin board (OTCBB) exchange.


Penny Stock Trading Strategies

Here in this article, we cover the common strategies employed by many penny stock traders.


Momentum Trading

There are times when penny stocks moves in one direction due to rumors or news or filings. To find these stocks, you need to be updated on the latest buzz on discussion boards and forums. Once you find stocks that are getting lots of attention, you need to look at different indicators like MACD and RSI, to confirm if the stock is really trending upward. Stocks moving in a momentum also have higher than usual volume; and it does not usually move following, or in proportion to market direction.

For example, you find a “hot” stock XYZ with a current price of $0.30. By all indications, you’ve confirmed that the stock is indeed trending up. You will place a bid immediately at the current price or a penny above if you see a large market order so you make sure that you get filled instantly. Once you’re in position, you may want to let it fly until you see indications that the trend is likely over. You need to stay glued to check indications like bids thinning out in level 2 quotes; or offers piling up; or your indicators are telling you to cash in on your profits.


Scalping

Because penny stocks can be very volatile sometimes and at times very slow moving, scalping can be a very effective strategy for this kind of stocks. In scalping you get in and out of position relatively fast for a small profit. For example, you buy 10000 shares at the bid price of stock XYZ. You will then sell these shares for a 1 penny profit on each share. In this trade alone, you will have made a $100 profit. Do this a couple of times and you’re set to profit a hefty sum.


Rebates Trading

Rebates strategy can be done on penny stocks that are listed on major exchanges. Unlike other trading strategies, in this strategy you will not have to count on price movements of a stock to make a profit. Rather, the profit is mainly derived from rebates offered by electronic communication networks (ECN) when you buy and sell huge volume of stocks on a limit order.

The strategy requires you to look at charts for support and resistance levels since this is where you’ll place your orders. For example, Alcatel (ALU) is currently trading at 1.07. Looking at the chart, you see support at 1.05. What you will do is place a limit buy order at 1.05. Once you get filled on this position, you will again place a limit sell order at 1.05 or 1.06. ECNs pay around $2.30 per 1000 shares but they will also charge $3 when you remove liquidity by making market order. Thus in the example given, if you have 1000 shares on ALU, you would have a profit of $2.30 if you closed it at 1.05 or $12.30 if you closed it at 1.06.

Trading will always involve a level of risk regardless what kind of stocks you’re trading. But you can always manage risk responsibly by sticking to solid methods and strategies for penny stock trading. After all the best traders are not those who dodge risks; they’re traders that understand the risk and employs strategies that will minimize it.









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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.