3 Questions for Choosing the Best Trades
Recently I’ve been traveling all over the world for my Save the Reef documentary that will debut in June for World Ocean Day.
This upcoming documentary will open EVERYONE’S eyes because the reefs are much more important to our survival than you think.
So I’m sitting here today, after my latest crazy travel adventure, thinking about how grateful I am for all those involved in this documentary, my students and loyal readers, like you.
It has inspired me to remind you to build your own dream life.
For me that involves trading stocks, teaching, charity and travel. And if you study hard, work hard and become an expert in whatever you are most passionate about…
You can then make enough money to earn your freedom, and spend ALL your time focused on whatever you want.
You’ll never have to “work” a day in your life!
If you do take this path be ready to push yourself and challenge yourself more than you ever have.
So, without further ado, let’s finish up the five step process for trading low float stocks.
Yesterday, I talked about steps one and two… common stock patterns and technical and fundamental analysis for low float stocks.
Today, I’ll cover the remaining three steps…
3. Create a Low Float Stock List
There are thousands of low float stocks out there. So how do you determine the top contenders to trade? This is where the importance of developing a watchlist comes into play.
Everyone’s method for making a watchlist is a little bit different. If you need a starting point, you might consider using the method of one of my most successful students.
He may start with a list of stocks that are up 10% for the day, trading around 300 million in volume. This list might consist of 5 stocks, or it might be as many as 20; it depends on the day and the market.
From there, he’ll go through every stock on the list and look at the daily charts to see if any patterns emerge or if anything seems to show promise.
Doing this can help determine if your approach will be to go long or to short.
Often, this will further narrow things down, because you don’t want a massive watchlist or you’ll be so busy chasing stocks that you might not be focused on the strongest prospects.
The few that seem most promising can be added to your watchlist. By performing this series of quick research, you can really narrow down your choices so that you can focus on the best contenders.
If you want to continue with this technique, go ahead and add it to a spreadsheet and design a trading plan for the few that seem most promising.
This preparation will help determine that if any of the stocks meet your criteria, you’ll be able to react ahead of the curve.
Having trouble narrowing down what should go on your watchlist? Ask yourself these questions to choose the best trades for you:
- Which patterns have you had the most success with?
- Where’s the most volatility (and most potential for profit)?
- Which way is the stock gapping pre-market?
4. Look For Low Float Stocks With High Volume
When looking at any potential stock, you should look at its volume. But this is extremely important when it comes to low float stocks.
With the lower supply in low float stocks, volume can be a powerful indicator that the price is going to see some action. The volume is more meaningful because of the lower supply that comes with low float stocks.
Bar charts can help you figure out the volume fast — they also give you the ability to quickly scope out any trends in the volume of a stock.
If the bars in the chart are higher than usual, this means that the stock is experiencing high volume.
This might be as the result of news, or it might just be a sign that it’s priced to move right now. You can use the volume to determine — and confirm — price movement.
Further, if the volume is raised when the price goes up or down, it’s a price move that is considered strong.
Volume is also important if you want to sell short. Low floats can be tricky because often, you can’t find access to shares to borrow. So you want to make sure that there’s enough volume, otherwise entry and exit could be hard.
To review: Demand from momentum traders — and limited supply for the short sellers — means that share prices can go nuts for short periods of time.
For example, if a stock has a low float, say 200k shares, it can move very rapidly up and down as compared to a stock with a float of, say, 50 million.
It’s going to take a lot more to rock the boat with more shares, whereas less action could have a bigger impact on the lower float stock.
Don’t get caught on the wrong side of it!
5. Keep on Learning
Repeat after me: I will never, ever, ever stop learning.
I can’t stress this enough. Learning how to trade is not a one-and-done sort of thing. It’s not like memorizing facts for a pop quiz.
The market is not static. It is ever moving, ever evolving. If you want to have a long-term career as a trader, you too need to continue to change and adapt along with it. That means you have to keep your eyes open and keep on absorbing knowledge.
Learning about low float stocks and methods for how to trade them is one thing. But you need to put it to work, test your theories with paper trading, and continue refining your methods for the best results over time.
It’s possible that you’ll come up with a setup that works over and over successfully trading low float stocks. But then, one day, all of a sudden it won’t work anymore. It’s just the way the market works.
It’s an ongoing process, so accept it and embrace it. Continue working on your trading. Keep a trading journal to monitor your practice. If this is the life for you, ongoing education will have to be part of it!
No matter what type of trading you want to get into, no matter what mentor you go with, keep this in mind: If you want to be an effective trader, you must study like crazy, do the work, and keep on doing it over time.
My Favorite Low Float Stock Screener
Where oh where should you go to screen for low float stocks? Here are some of my go-to resources:
StocksToTrade is one of the first platforms that offers great stock screening AND a platform to trade from.
Scanning and screening stocks for your watchlist is a snap with the constantly evolving and innovative research platform. This is the platform I used to find one of my biggest trades ever.
How to Find Low Float Stocks on Thinkorswim
Thinkorswim is another popular platform for traders, but it doesn’t come with a low float stock scan built in.
This means that as a trader, you may have to invest in an add-on from a developer, or you can perform your own research by looking up the company’s earnings report.
But once you’ve identified the low float stocks, this platform has plenty of tools for sorting them and determining which ones are worthy of your watchlist.
The Bottom Line
Low float stocks can provide many opportunities for traders. However, because they have a high level of inherent risk, it’s important to do plenty of research on potential plays before executing trades.
By making the most of screening tools, charts, and performing fundamental and technical analysis, you can make more educated trades, and — hopefully — reap good results.
— Tim Sykes
Editor, Penny Stock Millionaires