Day trading penny stocks is pretty risky and confusing for most traders. In this article, we shall understand how this is possible.
Trading penny stocks is difficult and quite irritating at times. Irritating because we cannot predict exact movements in percentage terms of stocks and hence chances of the stock showing exactly opposite moves to our predictions are many. If this happens, we stand to lose a lot of money. And also our self-confidence in trading stocks.
Penny stocks are those stocks which are trading at a very low value in the market. What attracts traders to them is the sudden and huge upward move which they show at times. In fact, most times, there are no fundamental reasons for penny stocks to give such huge movement. There are traders and investors who buy penny stocks just because they are cheap as compared to big socks and that itself is the biggest mistake committed by them. Penny stocks lack liquidity and very less outstanding shares are available for traders to buy. So, it may happen that you wish to sell them off when they are falling heavily; but no one wants to buy them because of the fear of the stock crashing to even lower levels. So, one must be extremely careful while dealing in penny stocks and trade with less amounts to avoid losses. Having said this, penny stocks are capable of doubling or tripling your investments within a year if you invest at the right stock and at the right levels. Now, let us know how to identify the best penny stocks for day trading.
Identifying Stocks for Day Trading
For investing in penny stocks, it is important that you track the recent movements in these. See whether the stock is in an uptrend, continuous uptrend or a downtrend. Try to relate the company’s financial performance with its stock price to get a clear idea of what the future stock price would be.
Choose a Safer Sector
For day trading penny stocks, you should choose a relatively safer sector which is not affected much by fluctuations in the market. Stocks of such sector would be safer bets than the one which is in news constantly. Investor sentiment for different sectors can be different at different time of the year and hence you need to study it carefully to know stocks of which sector are in demand.
Avoid Over Valued Penny Stocks
The best penny stocks to buy would be those which are fairly valued as compared to their peers. Valuations are always a matter of concern in the case of penny stocks because these stocks react very sharply to any kind of news. So, finding out their fair value with the help of valuation ratios such as price to earnings ratio or net profit ratio would be a good idea.
Sell on Up Moves
A common suggestion for all those adventurous traders indulging in day trading stocks would be to book profits at higher levels in these stocks. You would naturally want to earn money when you are getting a better valuations and this can happen only when you exit all your positions. So, be attentive and develop your reflexes such that you do not miss a single profit booking opportunity.
Day trading penny stocks can be done only with systematic stop losses and good stock research. You can also take help from processional traders and brokers in this regard. So, give it a try if your pocket allows you and reap the benefits. Good luck!
DISCLAIMER: This article is just for reference purposes and does not recommend any stock market transactions.