This is considered a type of swing trading where positions are kept from 1-4 weeks. This trader will usually play price oscillations and follow trend lines. Intermediate Traders will also look at ETF’s for possible trades to profit from ranges and price channels.
We consider swing traders to be traders that keep positions open from 1-4 days. A true swing trader may take fundamentals in consideration, but usually focuses on technical elements. We have found that the most profitable trades for Swing Traders come from Penny Stocks. We will usually look at fresh break outs, momentum plays, reversals and combine that with technical indicators. Swing trading is perfect for the trader that wants to participate in the market daily, but does not have the $25,000 needed to day trade.
Day traders exploit maket volatility to make money. They will have all of their positions closed the same day they are opened. There are many things that attract Day Traders to penny stocks. You must have $25,000 in account equity to participate in day trading. If you don’t have the money to become a Pattern Day Trader you will be limited to 3 day trades every 5 rolling days.
Styles of Trades
This basically referrs to trading stocks with increasing buying pressure, volume and price. This style focuses on stocks that are trading unusually high volume relative to its average. They typically sky rocket up before crashing down. Penny Stocks with momentum offer traders huge returns in a very short period of time. The key is locking in profits before the rally is over. Day Traders and Swing Traders alike can participate in momentum trades.
These trades are fairly simple and involve entering a trade when it is near a trend line. There is usually not very many Penny Stocks that trend so this is mainly for large cap stocks. Once in a while there will be a penny stock that will start a trend to the upside which is usually driven by news, speculation or manipulation.
This is a trade that is strictly driven by fundamentals. You will know a bargain trader when you hear “xyz is a steal at this price.” Things that factor in these trades are CAGR (compound annual growth rate) of the company or market sector, P/E ratio, competition, future products, mergers and acquisitions, income statement, statement of cash flows, balance sheet, economic factors, politicial factors etc… This trade is for position traders or investors. It is easier to trade large caps if you are looking for bargains.
When it comes to penny stocks reversals are 100% technical. Reversal is referring to the change in trend (up or down). This could be a long-term or short-term trend reversal. These are very risky trades, but offer some of the best profits for traders. For large caps reversals are slightly different due to valuation. A company could be over valued and start trending down, but when investors feel that the company is priced right they will usually jump in regardless of technicals. Even though the company may be a good value it is still risky since the trend is down. No single person can buck the trend. For the retail trader, it is best to wait for the trend to reverse and jump in once you feel a pivot point has been established.
Break out Trades
This referrs to a stock that has recently traded out of an established range. Stocks become range bound during consolidation. Stocks can get stuck in a channel for extended periods of time, but once they break out of that channel it can lead to a strong run to the upside. There are several different types of break out trades. There are intra day break outs, long term break outs, and gap break outs. Day traders play intra-day break outs all of the time. Long-term break outs attract swing traders and intermediate traders. Gap break outs usually happen becuase of a news release that causes the stock to open outside of the channel due to after hours or pre-market trading.
Speculation trades are very risky. Nobody should ever have their entire portfolio tied up in speculation trades. These trades speculate the outcome of rumors, start-up companies, and FDA approvals. The attraction to these trades is the potential profit to be made if they pan out. These trades are bets on future results of a given situation. Many people take on speculation trades by purchasing penny stocks, but very few ever pan out.
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