Why I Trade Penny Stocks and Why You Should Too
High-volatility penny stocks are the secret to my trading success. These low-priced stocks are characterized by rapid and significant price shifts. Yes, they can be risky … but they also present huge potential opportunity.
As I’ve learned over time, if you play things right, do plenty of research, and have a good trading plan in place (which we talked about earlier this week; here’s part 1 and part 2 for you to review), you can take advantage of the rapidly changing stock prices, both on the way up and down.
So how do you make these fast-moving stocks work for you? That’s where I come in. I’ll explain high-volatility penny stocks in detail, including how to identify them, the benefits of trading them, and how to approach this style of trading.
What Are High-Volatility Penny Stocks?
So … what is high volatility in penny stocks? To help you understand, let’s break down all three parts of the phrase.
- High: Greater quantity than normal.
- Volatility: This refers to the price range variation of a stock within a finite period of time, such as a day, week, month, or year.
In the context of a stock, if the price is spiking high and low and moving quickly and/or erratically, it would be considered volatile.
Oh, and just to clear up any confusion, volatility can be moving in either direction.
- Penny stocks: Low-priced stocks. In spite of the name, they’re not all literally sold for pennies. Personally, I’d consider a penny stock anything trading for below $5 per share.
In a nutshell, high-volatility penny stocks are low-priced stocks that are experiencing unusually rapid and significant price fluctuations. Typically, this is within a short period of time — these big shifts can occur not only throughout a single day, but even within hours or even minutes.
Examples of High-Volatility Penny Stocks
In seeking out high-volatility penny stocks, what exactly are you looking for? Here are some examples of the key characteristics that will point you in the right direction:
- Rapid price movement. When it comes to penny stocks, you’re not necessarily looking for stocks that are moving slowly and steadily over months. Rather, you’re seeking out stocks that are spiking rapidly, even within the course of a day.
The stocks that are moving quickly are the ones that you want to examine as a day trader, as these are the ones that provide the most opportunities for potential gains.
- Biggest gainers and losers. If a stock has been a big gainer or a big loser, it could be a sign that it’s a high-volatility penny stock.
Often, a big gain or loss is a good sign that the stock in question is experiencing volatility. Of course, this won’t always be the case, as it could be a specific catalyst or piece of news that is causing a one-off price fluctuation.
- Activity. If a stock isn’t moving much at all, it’s safe to say there’s not much activity going on. This means there are fewer buyers and sellers.
The problem here is that if you take a large position, you could find yourself in the highly disadvantageous place of not being able to unload your shares due to lack of demand.
With little activity on the stock, there’s likely little volatility. So if you’re looking out for high-volatility penny stocks, be sure to consider the volume and activity surrounding a security.
Key Benefits of Trading Volatile Stocks
This is important: volatile stocks have a higher level of risk than more stable and slow-moving stocks.
For some traders, this can be a real turn-off. Why would you want to engage in a risky investment strategy? The answer is that with risk comes reward. Here are some of the specific benefits of trading volatile stocks:
Opportunities for Traders with Smaller Accounts.
There’s a reason why both volatile stocks and penny stocks are dismissed by many affluent investors.
The volatility makes them undesirable as they are scared of losses, so they focus on what they deem more investments that are slower moving. Of course, they have large accounts that allow for larger investments and slower movement.
If you have a small account, high-volatility penny stocks provide you with the opportunity to grow your account quickly.
The fact that there are fewer institutional investors involved means there’s less competition and plenty of room for traders like you (and me) to grow.
This is how I earned my money, and it’s the method of trading I focus on most as a teacher/mentor with my students.
Works in Bull and Bear Markets.
There’s a reason why I remained profitable during the 2007/2008 financial crisis. That’s because I was willing to embrace volatility in stocks.
With high-volatility stocks, you can potentially profit both on the way up and on the way down. It’s all about following trends and patterns.
When the market is strong, I’ll buy stocks; when it’s weak, I’ll short sell them. This allows me to take advantage of volatility, regardless of the direction the stock is going.
This is a key lesson. It doesn’t matter if the prices are going up or down. It’s your ability to follow the price action and patterns that will help you mitigate risk and make intelligent trades.
Take Advantage of Undervalued Stocks.
Sometimes, stock prices go down for reasons that have nothing to do with the company in question. It could just be the market, or there could be a negative catalyst affecting one company which brings down other stocks in similar sectors.
If you’re willing to do your research and separate the wheat from the chaff, you can stand to benefit big time as these undervalued stocks rebound and make huge gains.
Attractive Entry Prices.
Let’s be real. One of the biggest advantages of penny stocks in general is their low price. They’re accessible to investors of all levels, even if they have a starting account of $500.
The entry price of penny stocks, particularly highly volatile ones, will be attractive. This can make it not only possible but highly tempting to just buy a ton of shares and see what happens, but I want you to take a more calculated approach.
You need to put together a detailed trading plan (Part 1 & Part 2) so that you’re not just betting that this $0.73 stock will go up. Even though your losses might be small, they mount over time, and it is important to set up good practices.
Scale Up Your Technique.
Whether you’re trading a stock that costs a dollar per share or $1,500 per share, the basic ideas of picking a stock remain constant.
You need to be looking at the company in question with your fundamental research, and to be researching the stock’s action with technical research. This is how you identify companies that have great growth potential yet steady enough growth to warrant a buy-in.
As your knowledge and your account both grow, you can scale up these techniques. This means that the same skills you develop trading high-volatility penny stocks can be applied to larger positions in the future.
The Bottom Line
Penny stock trading is completely unlike traditional ‘buy and hold’ trading. Volatility is by nature, fast moving and so the trades are as well. It’s why I love them so much. High volatility penny stocks are my bread and butter.
After reading this, if making fast profits with a small account using a strategy that works in any market sounds up your alley this may be for you.
Now that you know what the benefits of penny stock trading are, I’m sure you’re ready for me to explain how to find them. I’ll dive into all of that tomorrow.
Editor, Penny Stock Millionaires