As a day trader you will almost never hold stocks overnight so that means as a result you will enter and exit stocks in the same day holding them for varying lengths of time, sometimes a few minutes and sometimes all day. An investor on the other hand will wait out any short term price swings in the market and wait for the stocks to appreciate in value over time. For both strategies there will always be pros and cons for each.
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These traders will use the intra-day volatility of these shares to buy and sell accordingly to make money, and can often make numerous entries into the same share over the day. Volatility is as such a requirement in order to make consistent returns!
Volatile penny stocks are in abundance and it doesn’t matter which direction the general market is trending you can always find shares to trade.
Although volatility is a great thing when day trading micro cap stocks it does not come without its dangers because as quickly as a stock moves up, it can turn around even faster and you end up with a loss. If you are starting out and you experience a number of these losses in a row you can end up losing all your money very quickly.
If you remember to only ever trade with money that you can afford to lose you must still proceed with caution when starting to day trade small cap shares as the allure of making large profits comes with it a much bigger risk
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Be cautious of becoming caught up in what is known in the industry as a ‘pump and dump’ scenario which often occurs to those micro cap shares you may have seen advertised in your spam emails, in which investors rush into to buy the share quickly and then sell off at a profit and if you’re not fast enough you can end up with a sizeable loss. The worst case scenario is you are left holding stocks in a share that is now worthless and this ties up all your money to invest in other stocks.
You should set aside the majority of your investment money when looking to day trade penny shares and invest it into more established stocks or other more stable investment options and only trade with a small amount, especially if you are just starting out. You should base that decision by looking at how much of your investment can you afford to lose.
The next step is to set yourself up with an online brokerage account and if you are going to be a true day trader and only buy and exit positions on the same day then you should ensure you have access to live market data feeds as you do not want to be making decisions on data that is 20 minutes old. Your broker will charge you a small commission after they have executed the trade on your behalf.
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