“Tim! How Do You Find Penny Stocks?” Glad You Asked…
Yesterday, I talked about why I love penny stock trading and the rewards that it can offer.
Since you’re reading this I’m going to assume that you are interested in being a penny stock trader too.
But knowing that you want to trade penny stocks is just the first step. If you want to be a penny stock trader, you’re going to need to know how to find stocks to trade.
So how do you locate high-volatility penny stocks to trade?
Good news: it’s not rocket science. Follow these 7 tips …
#1 Figure Out Your Risk Tolerance
Do you know your personal level of risk tolerance?
This is hugely important when trading high-volatility penny stocks, because they have a higher risk level than investing in a blue-chip stock. But remember: this is why they can potentially deliver such handsome profits.
Here are two things to consider regarding risk tolerance and high-volatility penny stocks:
What is your goal? Is your goal to save for retirement over the next 30 years? In that case, penny stocks might not be quite the right direction for you. But if your goal is to grow a small account as quickly as possible, then high-volatility penny stocks could be just the ticket.
How big is your account? In terms of risk tolerance, your current financial situation may affect it. You may want to grow your account aggressively, but you never want to be foolish with your funds.
If you have a small account, it doesn’t mean that you shouldn’t trade highly volatile penny stocks, but it does mean that you need to start slow, taking small positions and working your way up incrementally.
Paper trading can be a great tool for traders who want to explore volatile stocks but haven’t built up the risk tolerance. It is a way of virtually trading stocks with an account size of your choosing. It’s just like real trading, but without real money.
With paper trading, can test out techniques and get your feet wet in the market of volatile stocks before investing your hard-earned capital. This can help you become more confident in your abilities, and more comfortable with the risk involved.
#2 Use a Stock Screener
Stock screening is just what it sounds like: a method used to narrow down your choices of stocks to consider trading. After all, there are literally thousands of stocks out there, and you can’t chase them all.
A stock screener is your best friend when it comes to locating the most appropriate stocks to fit your style, risk tolerance, and prowess as a trader. You can divide stocks by sector, by percentage gainers, and focus on float and volatility.
In particular, when looking at high-volatility penny stocks, you’ll be looking for markers of volatility.
Beta is one popular filter to measure volatility. It’s a way of figuring out the volatility of a particular stock as compared to the market at large.
So, say a beta of 1.0 is the standard market volatility. If a stock has a beta of 1.2, it’s about 20% more volatile than the market at large. If it has a beta of 0.5, it’s 50% less volatile than the market.
In this case, you’d be looking for a beta higher than 1.0, because you’d generally be looking for greater volatility than the market.
Of course, you need to remember that figuring out that a stock is volatile isn’t quite enough to make it trade-worthy. It’s just one of the many steps involved in choosing a stock.
#3 Create Your Penny Stocks Watchlist
Once you have a short list of penny stocks you’re considering, you’ve basically created a watchlist.
How you keep track of your watchlist is up to you. For example, you might choose to maintain and monitor it on your trading platform, as many of them have this capability.
However, many of my best students keep a more detailed spreadsheet for their watchlist so that they can really dig into their choices. You can learn more about my star student Tim Grittani’s watchlist making method in this video.
To clarify, your watchlist is NOT a list of stocks that you will definitely trade. Rather, it’s a short list of stocks that you’re considering trading if and when they meet your specific criteria.
#4 Technical and Fundamental Analysis
Once you have a strong watchlist, you want to have a plan in place to help you decide when it’s time to make a trade. So how do you create a plan, determine entry and exit points, and take it to a point where your risk is more calculated?
By performing technical and fundamental analysis.
Ideally, you want to find the stocks that have the best combination of reliable pattern, good fundamentals, and high volatility. Your research will help you determine this.
Fundamental analysis has you looking through the company’s financial information, news releases, and plans for the future.
You’ll be looking at things like their earnings reports and seeing how the company is doing in a large, overarching way, because this has a direct impact on the stock price now and in the future.
Technical analysis is where you hit the charts hard and look at the historical data behind the stock’s price movement. When you look at its chart, can you see distinct patterns? I love patterns and consider them one of the most important things when choosing stocks.
Be sure to look at daily, weekly, and yearly charts to try to discern any patterns that look like they might be repeating.
Once you’ve done this for all of the stocks on your watchlist, you probably have some favorites emerging. Hopefully they have high volatility and nice, clean patterns.
If you have a few really strong contenders, you may want to outline a trading pattern for each of the stocks, so that if the criteria you’ve set have been met, you’ll be ready to rock and roll and execute the trade.
This will help you be prepared for when the time is right to make the trade.
#5 Follow Your Stock Indicators and Favorite Patterns
PURA chart: Supernova Source: FreeStockCharts.com
Next is the hard part: the watchful waiting. You have a strong watchlist, and you have planned your entries and exits. You have a potential trading plan for a few strong contenders.
Now, you need to watch and wait and see what they do. You can set up alerts on different stocks so that you can monitor when they break the support / resistance that you’re looking for, or when they make moves that you believe makes the trade worthwhile.
You might even set up a limit order so that once the stock price reaches your desired level, you can execute instantly, even if you’re away from your computer.
Based on the pattern, you can consider what your stop loss would be, too. This might be mental–if it gets to this price, I’ll cut losses and sell–or it could be an actual stop loss order.
It’s important to keep on monitoring what happens with a stock, because the landscape is ever changing. What happens to a stock as you monitor could make a trade more appetizing, or could make you want to walk away.
Even if you never end up trading a stock you’re following, you’ll always learn something from monitoring it.
#6 Look For News Catalysts
The most volatile penny stocks typically have catalysts that are affecting the prices, so it’s important to keep updated on the news.
Many trading platforms conveniently link to the latest headlines right on the ticker’s page, or you can enter the ticker in a website like Yahoo Finance to pull up recent headlines, news, and analyst reports.
Be sure to keep updated on these things on a regular basis, because you may pick up on news or events that could have an impact on the price — and your decision to make the trade.
For instance, if you’ve been waiting for an entry point for the stock and you hear big news that the company has a big new merger or an exciting new hire, this could be the time to jump on executing the trade while the price is right.
On the other hand, negative news could provoke you to decide to short sell, or might make you rethink the stock in question.
Remember, though: Just because a stock is on your watchlist doesn’t mean you ever have to trade it!
Sometimes a catalyst will come along that disrupts the pattern. If you don’t feel confident and like you’re able to manage your risk in a position, it may be best to remove a stock from your watchlist for now. Sometimes the best trade is no trade.
#7 Improve Your Trading Skills
When you improve your trading skills, it’s like a rising tide that lifts all boats. That is to say that the caliber of every trading technique, including finding worthwhile high-volatility stocks, will improve.
Day trading classes can be hugely helpful in teaching you the necessary basics so that you can focus on trading rather than trying to figure out the meaning of different indicators and trying to figure out how to create a watchlist.
The Bottom Line
High-volatility penny stocks can provide opportunities to grow your account quickly and exponentially.
This can be extremely enticing for traders at any level, but it’s particularly appealing to traders with small accounts, as it lets them in on the action without a huge output of cash.
However, as the name implies, these stocks are indeed volatile. It’s very easy to make mistakes that can cost you capital if you don’t do your research.
Before you begin trading high-volatility penny stocks, it’s extremely important to take the time to do thorough fundamental and technical analysis to mitigate risk. This is what will make the difference between gambling and taking a calculated risk in your trades!
Editor, Penny Stock Millionaires