| I was recently asked if I ever traded penny stocks, | | | | Trading penny stocks profitably involves trying to |
| and if not, why not. The answer is simple: No, I | | | | catch all of a very small move. Trading regular stocks |
| would never trade penny stocks. | | | | means catching a small part of a large move. |
| My own trading strategy is based on taking very high | | | | Of course, you could try and overcome the relatively |
| probability trades on volatile stocks with strong | | | | small range of penny stocks by trading them in much |
| momentum. Penny stocks are pretty much the exact | | | | larger quantities. But the fact remains that their low |
| opposite of the kind of stocks I choose to trade | | | | volume means their prices move in an erratic and |
| each day. Let's take a look at why. | | | | unpredictable way. The slightest thing can throw |
| First off, momentum. For a stock to have strong | | | | them off balance. This makes them much harder to |
| momentum, it needs good volume behind it. That | | | | trade. The probabilities are stacked against you. |
| means lots of people buying and selling in large | | | | One further complication with trying to deal in penny |
| quantities. Penny stocks typically have very thin | | | | stocks in any kind of quantity is that there may not |
| volume (few people buying and selling, and only in | | | | be anyone to take the other side of your trade. As I |
| small quantities), so they have no momentum. As a | | | | mentioned, penny stocks tend to trade on thin |
| result, any movement that does happen in the price, | | | | volume. If you want to offload a lot of stock at the |
| runs out of steam quickly. | | | | current bid, you may find that bid dropping away |
| Secondly, probability. For a trade to be high | | | | quickly. |
| probability, I want the stock price to move a long | | | | Trading penny stocks is a bit like trying to fill a |
| way in one direction. It doesn't matter if the price | | | | bucket in a rain shower. You can run around trying to |
| goes up or down, I can make a profit either way, | | | | catch every tiny drop, not knowing where the next |
| but it needs to go a long way in one direction. A | | | | is going to fall. You might fill the bucket eventually, |
| stock priced between, say, $25 and $100 will have no | | | | but it's hard work. |
| problem moving a dollar or more in under half an | | | | On the other hand, you could take your bucket to |
| hour, and often much quicker than that. Catching | | | | the river and dip it onto the massive flow of water. |
| even just 25 cents of that move is quite easy, and | | | | You'd only need to catch a tiny percentage of the |
| very profitable. | | | | water flowing past, to fill your bucket in no time at |
| By contrast, most penny stocks won't move even | | | | all. This is what life is like when you trade with well |
| 25 cents all day, and probably not even all week. | | | | selected "regular priced" stocks. |