Small-cap stocks are extremely popular with both short-term traders and long-term investors. However despite the fact that they can generate substantial profits, they also carry a lot of risk. This is why you need to stack the odds in your favour and one way you can do that is to concentrate on trading high volume stocks.
In trading circles volume basically refers to the number of shares that are traded in a particular company. With larger companies this figure is largely redundant but when trading smaller companies it can provide some vital clues as to the future direction of the share price.
The key to success is to keep your eye out for small-cap stocks that are suddenly seeing very high volumes, ie much greater than their normal daily average. This is because you will often find that these initial surges of volume will mark the start of a big price move.
It’s not always clear why certain shares are suddenly spiking up on high volumes. It may be due to rumours surrounding the company regarding a possible bid approach, or it may simply be down to a wealthy private investor or financial institution buying a stake in the company. Alternatively it may be an actual director who has decided to increase their overall stake in the company.
It doesn’t really matter too much because a move upwards backed by abnormal volumes is often enough to create a sharp price increase, at least in the short-term. So it can be a very profitable strategy to find these momentum stocks and jump on board as soon as you notice a sharp spike in volume.
You can either do this manually or use some kind of screening tool to help you. I personally use some charting software that lists every share that is showing abnormal levels of volume and it helps me enormously. I simply look at this list, check out the chart for each of these companies and finally look at both the fundamentals and the latest news surrounding a particular company to see if it’s worth trading.
You can make some great short-term gains trading this way because the price will often continue rising at least a few days after the initial spike in volume. You don’t necessarily have to trade long positions or buy the actual shares either. If you have the capability to go short, you can look for small-cap stocks that are falling on increased trading activity. These can be just as profitable because they may be due to an upcoming profit warning.
Of course we all know that insider trading is illegal but it’s amazing how often you get much greater trading activity just before any major news announcements. So the point is that you really should be looking out for unloved small-cap stocks that are suddenly seeing much greater trading activity because they can alert you to some really profitable trading opportunities.
Article Source: Articles Engine