Day Trading Penny Stocks – Playing the Pumps
This article will give you a road map on how to get started day trading penny stocks. There are a few steps you need to take in order to become a penny stock trader. This guide will help you get started.
Penny stocks can be super volatile, which is good for day trading. However, on the other side of the coin, these stocks can also lay dead in the water. It’s important to recognize the good from the bad. By the end of this guide, you'll learn how to spot the trend.
When there is a lot of trading activity, the penny stocks tend to do crazy things.
When trading penny stocks, you have to keep in mind that they are easily manipulated. Our penny stock strategy will teach you to detect when the price manipulation is coming so you can take advantage of it. We can’t stress the importance of planning and managing risk before starting.
Our team at TSG believes there is a big inherited risk to hold penny stocks overnight. This is the reason why we advise our trading community to only day trade penny stocks. You’ll notice when trading penny stocks, usually after a huge spike in volume and rush in price the price will immediately collapse and then go into consolidation.
Day trading penny stocks can be highly profitable if you use penny stock trading strategies that are designed to detect these penny stock price manipulations.
First, let's get started by giving you a quick intro into penny stocks, and then move to our penny stock strategy. We can't promise you’ll become a millionaire penny stock trader, but you can still make a decent living day trading penny stocks.
What are Penny Stocks?
"Penny stock" is a term that describes a low priced stock. Penny stocks are stocks that trade under $5 per share. These are common shares of small companies, which is why most of these stocks trade for pennies.
The same like the Forex currencies, most penny stocks trade over the counter, but you can also find some penny stocks listed on major stock exchanges such as the NASDAQ or NY stock exchange.
So, what else you should know about penny stocks?
Some penny stocks have very low volume, which means that it can be very difficult to buy and sell shares of these stocks. Other penny stocks are very volatile and have huge up and down price swings.
You also need to be aware of the pump and dump schemes, and the stock promoters who act as shills to manipulate the penny stock price. The bottom line is that you need to be very careful how you trade penny stocks, and you have to use the best penny stock strategy to survive in these shark-infested waters.
Next, we’re going to highlight our penny stock strategy rules, and how to identify the pump and dump manipulations.
Penny Stock Strategy
Pump and dump trade setups are very vicious. You need to be very fast when trading these penny stocks, so you won’t get caught the wrong foot. Trading the pump and dump setup is like playing with fire. If you really want a safe way to master penny stocks, playing the pump with our best penny stock strategy is the way to go.
We’re going to give you some penny stock tips and a real example of a classic pump and dump setup.
Now, before we go any further, we always recommend taking a piece of paper and a pen and take notes over the rules of this entry method.
For this article, we’re going to look at the buy pump and dump penny stocks.
Step #1: Scan for hot penny stocks that have a net change in price between 5% and 10%
The way you search for hot penny stocks is to use an online stock screener. We’re using the best penny stock trading site MarketWatch stock screener which is available for free. The first criteria for our penny stock strategy is that we need to see a net change in the price of at least 5% but no greater than 10%.
The minimum 5% penny stock price change will ensure that we’re potentially entering in the markup phase of the pump and dump scheme. While the maximum 10% penny stock price change will ensure that we don’t have a runaway market.
*Note: We’re only looking to trade penny stocks between $0.10 and $5.
The penny stock screener will likely return a lengthy stock list like the one below:
Many of these penny stocks have a really low trading volume, which we want to avoid because we only want to trade the top penny stocks.
The next step is to trim down the number of penny stocks.
Step #2: Scan high volume penny stocks that are trading for the day. Filter down penny stocks that trade more than 250k shares.
The next quick way to filter down our list is to focus only on high volume penny stocks and remove penny stocks with low volume.
After applying the second filter we’ve managed to bring our penny stock list down from 85 penny stocks to only 28 penny stocks.
Let us inspect the Nasdaq penny stock lists below:
To quickly recap, we’ve used three filters to select the top penny stocks:
- Penny stocks that trade between $0.10 and $5.0
- Penny stocks that have a net change in price between 5% and 10%.
- Penny stocks that have traded a minimum of 250k shares.
Additionally, you can also check for penny stocks that have only very tight spreads.
Now it’s time to select one penny stock that meets all of our standards and see if they comply with our technical pattern to day trade penny stocks. Furthermore, we’re also going to apply to the chart all the technical indicators required to trade the pump and dump setup.
Step #3: Attach to the chart the Bollinger Bands indicator in combination with the On Balance Volume indicator.
The Bollinger Bands indicator is a great tool to use, especially when looking to find explosive movements in price. Instead of using the net volume indicator we’re going to use the On Balance Volume or OBV which combines both price and volume to show you the total amount of funds going in and out of the market.
To further filter out the validity of the markup phase, we also apply the 100 moving average over the OBV indicator.
For the purpose of these examples, we picked VIVUS Inc.
At this point, we’ve been able to apply all the filters and technical indicators needed to day trade penny stocks.
Now let’s dig into the chart of VIVUS to see how it measures up against our pump and dump setup.
Step #4: Price needs to break and close above the upper band. The BB bands also need to move horizontally.
A markup phase, which is the first phase of the pump and dump trade setup is really tricky to identify. Our goal is to make sure we have enough profit margins to profit from these price manipulations.
If prior to the breakout above, the upper BB band and the bands move horizontally, the stronger the pump and dump setup is.
Next, we’re going to outline the trigger for buying pump and dump penny stocks.
Step #5: How to Buy Penny Stock: Buy when the OBV breaks above the 100-MA
Jumping forward, we buy penny stocks after the OBV breaks above the 100-MA. Secondly, if this trading condition is not satisfied during the first 4 candles after the penny stock broke above the upper BB skip the setup.
We want to see the volume confirming the breakout otherwise this in our book is a fake breakout.
In terms of stop losses, we use a very simple approach.
Step #6: Place protective stop loss below the lower BB.
Based on our penny stock trading strategies, we place our stop loss below the lower Bollinger Band. If enough trading volume is behind this breakout the penny stock price shouldn’t break below the lower BB.
With penny stocks, it is very important to use proper risk management and never get married to any trade.
Next, we’re going to outline a simple price target strategy.
Step #7: Take profit when the penny stock price breaks and closes below middle BB
When penny stocks are dumped, somebody is always left holding the hot potato. We want to make sure we are not the one holding the bag so we’ve adopted an exit strategy to help us get out of the dump and dump scheme before the crash.
We recommend you to take profits once the penny stock price breaks and closes below the middle BB.
Conclusion – Penny Stock Trading Strategies
Remember to always exercise extreme caution when day trading penny stocks. Always get started trading penny stocks by paper trading until you become comfortable and have a deeper understanding of how penny stocks behave. You also need to avoid free penny stock picks because traders get burned by this more than anything else.
The only way to effectively day trade penny stocks is to filter out the high-quality companies first using our penny stock trading guide and then use technical analysis to time the market. You may also like this guide on the Best Penny Cryptocurrency 2018.
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