Low priced stocks swing trading

[brownsfan019 17]

I wanted to discuss in this thread the pros/cons of some swing trading of 'low priced stocks' otherwise known as penny stocks. Now, by definition, penny stocks are those under $5. I'm not talking about the ones trading for .0000001 penny.

 

Reason for the thread is that for simple minds like me, just outright purchasing a stock is easy. Option plays just add another element of analysis that needs done.

 

So, if we talk about stocks say $1 - $10 / share, there's really no need for options. I suppose you could, but with lower priced stocks, the cost factor is minimal.

 

Of course there's some disadvantages to 'cheap' stocks, but I'm not looking to marry these things. These are not going to be in my retirement accounts. For lack of a better way to describe, these are more 'wham bam thank you mam'. Get in, get out and move on.

 

The catch for me is that I haven't done much with stocks, let alone our 'cheapies' so I thought we could discuss the good, bad and ugly of them. I suppose if your analysis is solid, does it really matter if the share price is $1 or $100?

 

Well, let's see if there's any interest or ideas about trading the 'cheapies'. From a swing trading perspective, there are some possible plays out there and just wondering what some here think about them.

[TinGull 10]

IN a newsletter I get every morning, the fellow who writes it had this to say about this very topic 1 week ago today...

 

Example 1: You decide to buy 2,000 shares of an ETF that is priced at just $15 per share. Excluding commission, it would cost you $30,000. If that ETF moves up 4% in value, your gain will be 60 cents per share, making the new price of the ETF $15.60. $15.60 per share times 2,000 shares now gives you a total value of $31,200. This equates to a net gain of $1,200 on a capital investment of $30,000.

 

Example 2: You buy a higher priced ETF, but since you are limited to $30,000 in capital, you can only buy a limited number of shares. The ETF you want to buy costs $150 per share. Therefore, you are only able to buy 200 shares of this stock So, you buy your 200 shares, and the ETF subsequently moves up 4% in value (same as the previous example). A 4% appreciation gives you a net gain of $6 per share, which now prices the ETF at $156 per share. $156 per share times 200 shares gives a total value of $31,200. Therefore, your overall net profit is $1,200 on capital of $30,000.

 

As you can see from the above examples, when an ETF moves up or down by any given percentage, your profit potential is not affected by the number of shares owned. A 4% gain is the same profit whether the ETF is cheap or expensive.

 

Expensive ETFs will proportionately move more points than lower priced issues, but when you look at the gains in terms of percentages, the end results are the same. Obviously, there is nothing wrong with buying ETFs that are inexpensive and meet all the other criteria, but just make sure not to limit yourself. If your capital is limited, you may indeed feel kind of silly buying only a small number of shares at times. I sure did. But the bottom line is the same.

 

We'll conclude this point with a reminder that higher priced ETFs and stocks are expensive for a reason. They are the leaders of the market because institutions are buying them! Conversely, cheap stocks and ETFs are that way because they're not in demand. Always buy the leaders, not the laggards.

 

--From Deron Wagner of Morpheus Trading Group

 

(I'm not compensated in any way by this guy, just a fan)

[Reaver 10]

Good info Tin. It seems obvious once you hear it...but I had never thought about that.

[WHY? 16]

I know this sounds crazy and risky and goes against the grain of what many traders think but:

 

Alot of money can be made daytrading and swing trading penny stocks. Many penny stocks have an average daily trading range of .03 to .06. All you need to do is catch a slice of that range. Look at it this way -10,000 shares of a stock that costs .30 per share is a 3000.00 investment. If you capture .03 you make 300.00 minus commissions.Your rate of return is 300 divided by 3000 = 10%. Another example. You buy 5000 shares of a penny stock that is .10 per share so you have invested 500.00. You immediateley place an order to sell all 5000 shares for .13. You were able to sell out at .13. So you made $150.00 profit (5000 x.03). To invest $500.00 and make $150.00 in a few hours is a very good rate of return on your money (30%). Try to make 30% on your capitol in one day with GM. Alot harder to do and alot more capitol. Do this 4 or 5 times a day with a penny stock and you can be into some fairly good money. The advantage in buying penny stocks is you can get a higher rate of return on your money invested. The disadvantage of penny stocks is they tend to be more volatile. They can shoot up real quick in price and drop real quick. In one sense that is good as you need movement to make money but it can be bad if the movement is in the wrong direction.

 

The secret is to ONLY attempt to capture a portion of the expected range. This enables you to get out QUICKLY with a profit. You are only borrowing the stock for a few minutes or at the most 1 to 3 days. Remember, you will be trading for quick, small, and sure profits. Trade only penny stocks this way that have at least 100,000 vol each day. Wait for a few minutes after the open to see what happens (no gap openings..etc) before taking a position. There may be times in a fast moving stock that you will try to capture the full expected range but most of the time it is best to settle for a portion of the range.

 

The other downside to trading pennies is once in while you might get hit with a bankruptcy before you can sell the stock. That is why it is necessary to get in, grab your slice, and get out. Best not to ever carry a penny stock over 3 days. I have bought and sold the same penny stock several times in the same day.

 

A third disadvantage is most brokers will not let you short a penny. So, you are stuck with taking only long positions.

[Nick1984 10]

WHY? the problem with what you just described above is that penny stocks suffer from the curse of little to no volume. There is very little chance you can purchase a substantial holding of shares and immediately turn around with a sell order 3-4 ticks above your fill and have a perfectly executed trade. Well let me rephrase that. You can't do that and expect to make a decent living. The volume turnover on penny stocks is too low. Usually any trade with a value worth over $8-10k gets noticed easily.

 

Penny stocks are better traded using option spreads. You're way better off buying an in the money call on penny stocks you think are bullish and vice versa for bearish stocks or simply take a spread. The open interest on options in penny stocks is still usually high enough to be able to trade the options where the option itself will give you access to a much larger parcel of shares than buying the shares directly.

[brownsfan019 17]

Tin,

Thanks for sharing. If we assume that Stock A and Stock B move the same in terms of %'s then it makes sense that it's irrelevant which one you play.

 

Here's the next question then - can we assume that a stock at $1.00/sh will move the same as one at $100.00/sh? B/c that's the assumption made in the article.

 

Now, in terms of dollar moves, the $100/sh will in fact move more usually; however, the $1/sh can literally double in front of your eyes. The odds of the $100/sh doubling anytime soon is much less.

 

So, that's what I am seeing or thinking here. To assume these stocks move identical is a mistake in my opinion. Not saying that is good or bad for either argument, but I think there's some potential issues there.

 

Example - the $1/sh goes to $2/sh over a few days or weeks. The $100/sh goes to $125/sh in the same time period. Now the returns are 100% for Stock A and 25% for Stock B. Which play now looks attractive?

 

Again, just opening up the discussion here, not saying $1/sh stocks are good by any means. I have one that I found (in hindsight) that I will get a chart up to illustrate my point here.

[brownsfan019 17]

Why - you bring up some valid points and if it can be done with regular profitability, then it looks good on paper. I've never touched pennies (under 1 dollar) so I can't speak on behalf of this type of strategy. Odds are it can work if you find enough volume and a system that can do it.

[brownsfan019 17]

Here's the one I was talking about:

 

 

 

I have no clue what DPDW is or does. Don't care. I'm guessing there was some news or something to drive up the volume and interest in this stock.

 

From the initial buy, you are in the area of a 100% return in 10 days or so from the initial entry.

 

10 days, 100% return. Sounds good to me.

 

Again, I just saw this after the fact, so take it for what it's worth. I find this stock while checking out Sykes blog. Not an endorsement for anything Sykes is selling, I just checked out his blog and this one caught my eye.

[TinGull 10]

Sure, I understand your point that it's "easier" for a 1 dollar stock to double than it is for a 100 dollar stock to double. No question about that. How often does that doubling happen in a dollar stock for every time it happens in a higher priced stock I have no clue. I tend to look for stocks in the 20-50 dollar range, tho small priced ones like JAVA and JADE interest me. Watching JAVA right now on a 2 hour chart:

 

 

If a low priced stock has a deep options market, even the better

[WHY? 16]

WHY? the problem with what you just described above is that penny stocks suffer from the curse of little to no volume. There is very little chance you can purchase a substantial holding of shares and immediately turn around with a sell order 3-4 ticks above your fill and have a perfectly executed trade. Well let me rephrase that. You can't do that and expect to make a decent living. The volume turnover on penny stocks is too low. Usually any trade with a value worth over $8-10k gets noticed easily.

 

Penny stocks are better traded using option spreads. You're way better off buying an in the money call on penny stocks you think are bullish and vice versa for bearish stocks or simply take a spread. The open interest on options in penny stocks is still usually high enough to be able to trade the options where the option itself will give you access to a much larger parcel of shares than buying the shares directly.

I don't know about option spreads but I have made many many trades in pennies using the strategies above. Granted anything over 10,000 shares is harder to do but there are days it can be done easily even 20,000 shares ..on days a penny spikes. However, normally 5000 shares seems to be a good amount to buy and to be able to sell. Even pennies trading at 60,000 shares it is not that hard to get rid of 5000. IF you only are intent on capturing a slice of the range. IF on the other hand you try to capture the full range it is harder. Don't trade any penny stock that has under .03 average daily range. Try to capture just .01 or .02 cents of that range. If the stock has an average of .05 try to capture .03. There are many stocks that trade 100,000 to 300,000 shares day. It is not that hard. If you just make two a day capturing just .02 each trade day on 5000 shares that is 180.00 per day net after commisions depending on the broker. The big problem with penny stocks is again..trying to capture too much of the range, second...dealing in too many shares, third dealing in pennies under 100,000 shares vol daily (although I have done it successfully many times), volatility....you must wait and see what happens right after the open before you do anything, holding on too long ...just capture that slice..get in out out preferably the SAME day, and occasionally getting hit with one that goes out of business.

[Nick1984 10]

In my experience with penny stocks the best ones to trade are stocks that are in the biotech and mining (uranium especially) industries. These are the ones that are the most volatile so you can catch a lot of movement. These guys usually like to move between 5-15% a day. Thats heaps. If you look at the market cap of these guys the sub $500m stocks are way too risky cause the volume going through is horrible. But if you can find a stock between $500m-$1b then you can get some decent value going through each day between $500,000-$8m a day which is pretty decent if you're trading with a $50k-100k account. You certainly can day trade these guys and try to catch a portion of the move as WHY? says.

 

Brown, for the 100% returns you're talking about you really need to go in and do a bit of some fundamental research on the stock to see what the company does etc because if you try to catch those moves on most penny stocks you'll hit your stop before anything major happens. Your candlestick analysis seems very spot on though. This high volatily is why I say go for biotech or mining companies because a lot of these guys move up heaps on small announcemnts. I.e: If an explorer announces they just got a tenement somewhere in some 3rd world country where regulations are few and far between watch the price rocket up 40% in a day only to tumble down 50% later once the first few bore holes show low mineralisation or unrealistic strike depths!