2 Key Indicators to Check Before Trading These Stocks
As I explain in my PennyStocking 101 guide,
“Since there’s not a lot of supply out there and if the company announces good news, ‘low float stocks’ can spike 50%, 100% or even 200% in a day whereas stocks with many publicly available shares can’t spike that much since there are sellers at every level on the way up willing to take profits.”
Now that you’ve evaluated the pros and cons of trading low float stocks, maybe you’re intrigued.
That leads to the next question: how to find low float stocks?
Consider looking at these two key indicators to narrow down your choices …
1. High Volume
When it comes to the stock market, volume equals movement.
Volume is the number of shares of a stock traded during a finite period of time. This is based on every transaction — because for every buyer, there is a seller. So every buy and every sell aren’t added to the volume separately, but rather as a single transaction unit.
Volume is an overall important indicator to use as part of your technical analysis because it can help you determine the strength of the price movement of a given stock within a given time period.
When a price moves, the bigger the volume, the bigger and more meaningful the overall move. This is particularly true for low float stocks. So when looking at low float stocks, be sure that they have sufficient volume before getting into a trade.
2. News Catalyst
The very fact that a stock is low float indicates that there is a relatively small supply of stock shares available for trading. This means that the supply and demand can shift on a dime.
So when a juicy news catalyst hits, it can strongly impact the price of a stock in question, causing it to rapidly rise (or fall, depending on the news) in price.
As a trader, it’s possible to profit both as the price goes up or as the price goes down — it’s just a matter of figuring out which way the stock is moving.
How can you use the news to your advantage? First, be sure to research the catalyst to see if the news “has legs.” Cut through the bullshit of self-serving PR statements and try to find the real scoop yourself.
Be sure to back it up with research from the earnings reports and by checking out the stock’s charts to see if you can find any strong patterns.
If you’ve identified a strong news catalyst and can back it up with research, it’s a key indicator that a low float stock could be moving in ways that could offer trading opportunities.
Of course, I should add a caveat about rumors. Rumors can move a stock price, but you shouldn’t necessarily trust them!
How to Trade Low Float Stocks in 5 Steps
Now that you have some basic knowledge about low float stocks, how can you put it to work?
Here are five key steps that you’ll need to follow to trade low float stocks.
Once you read through these, get even more of a scoop with real-life examples: You can see more about my approach for trading low float stocks and what I look for in potential trades in this video.
1. Common Stock Patterns and Technical Analysis
When seeking low float penny stocks, do as you would with researching any penny stock: Look for common stock patterns and make use of your technical analysis.
Let’s start with technical analysis. As a trader, I rely a lot more on technical analysis than fundamental analysis.
Technical analysis is where you play mathematician or scientist with your research. Your key focus is on the stock’s action based on past performance.
I trade by patterns, numbers, and proven trends — not based on gut instincts or rumors. It keeps things very simple and helps me focus on not getting emotional about trades.
When it comes to performing technical analysis, there are different tools of the trade that different traders rely on.
Personally, I use a combination of the simple moving average, moving average convergence/divergence, relative strength index, parabolic SAR, and my own past experience.
When I say my own past experience, I guess I’m relying a little bit on hunches, but these are based on what I’ve seen over the years and not based on believing in the hype!
2. Fundamental Analysis
When it comes to trading stocks — low float or otherwise — I put the majority of my faith in technical analysis.
However, this doesn’t mean I totally skip fundamental analysis. In its own way, it’s just as important, and it can act as either proof positive of your technical data, or it can introduce new food for thought.
Fundamental analysis is where you take a look at the business that is offering the stock and how its performance might affect the stock price.
Your bible in fundamental research is the company’s earnings reports. You can read through the company’s earnings report to gain valuable insight as to how they’re handling their finances, their debts, and read commentary from high-ranking company executives.
To understand fundamental analysis, you’ll need to know a few basics about business finance. Things like operating income and financial statements come into play here, so you may need to familiarize yourself with some of these concepts.
I think that’s enough for today.
Let’s jump into steps 3-5 first thing in tomorrow’s issue.
And then you’ll be well on your way if you decide to give low float stocks a try.
— Tim Sykes
Editor, Penny Stock Millionaires