Understanding Penny Stocks for Day Traders

If you want to reach a state of financial freedom, you need to pick the right lane. Do you want to focus on the big time stocks that are stable and very unlikely to be volatile? Or do you want to trade in a space where the stocks are cheaper, but more likely to make moves to make you profitable? Penny stocks can provide that type of environment even for a new trader.

Penny stocks, as defined by day traders, generally fall into the category of $2 to $10 per share. They don’t actually cost pennies. They represent small cap companies that are trading with enough volume so that active traders can leverage enough shares to make a profit with their trades. It is a delicate balance and it can require trading on margin, which is basically trading on credit.

As an aspiring day trader, you need to be able to anticipate trends and pick hot stocks before they make their moves. It takes time to learn how to do that. That is where a day trading education site can come in handy. Finding a place where you can learn strategies and techniques from veteran traders through online video courses, where you can interact with other traders in a community of like-minded people, that can be a real asset for a newbie. It provides a place to learn valuable lessons before risking real money.

Penny stocks can make huge jumps during a particular day of trading. Being able to anticipate which stocks are about to make a jump is a skill that can be learned. You need to look for the right market conditions, the best historical data and technical indicators that precede a run on a particular stock. If you can jump in at the right bar at the right time, you can position yourself for a trade that makes 20-30% profit. Add up a bunch of those and you are in good shape for the day. Then string 4 or 5 good days together and you will have a profitable week. That is how you start.

The key is to search for the medium sized wins, instead of going after huge scores. You are not going to find the next Apple or the next Facebook in penny stocks. That is looking for a lottery ticket. Playing the lottery is very bad odds. You want to look to be profitable 60% of the time and keep your profit/loss ratio at 2/1. That means that your losses are small enough that your profits are going to come through on top.

Being able to trade in a simulated market with virtual currency gives you a chance to make the wrong moves and still survive to trade another day. That makes the learning curve a lot shorter when you get into trading real money.