Learn to Float in 5 Easy Steps
Dear Penny Stock Millionaire,
Yesterday we talked about floats. No, not the kind you would find in a pool, or a parade. The kind that make penny stocks volatile. If you missed it, click here and read all about it.
Now that you have some basic knowledge about low float stocks, how can you put it to work?
Here are my five key steps that you’ll need to follow to trade low float stocks.
#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.
You might not make a final decision about whether to execute a trade based on what you find in the earnings report, but the more educated you are before executing, the better!
#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, Tim Grittani.
He may start with a list of stocks that are up 10 percent 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 Tim’s 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 three 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.
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.
Editor, Penny Stock Millionaires