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Advanced StrategiesUnderstanding Penny Stocks

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Short-Term Trading

Most short-term trading is driven by impatience and greed. However, the impatient and greedy investors never develop winning short-term strategies.

If you want to trade quickly to make a quick buck, forget about it and skip on to the next section. If you want to trade short-term because you believe that there are profitable trading theories that can be applied to stock fluctuations, keep reading.

Pops and Dips

Sometimes shares can spike or dip just due to a large trade order. This is because penny stocks are generally thinly traded, and any significant volume will push the stock around. Take advantage of this by selling into the rise, not after. You want to be unloading your shares into the buying frenzy, because in this situation it is better to be much too early than a little too late.

Before you sell, however, be sure to discover if the move is permanent or temporary based on the following criteria:

Fundamental Driving Factors: Tangible impacts like FDA approvals, new mining discoveries, etc, may make the share price jump, and stay higher. Selling into this is not generally a profitable strategy. In other words, if it is a temporary price pop, it may be a profit-taking opportunity. If it is a permanent price increase based on a legitimate driving force, it may be more effective to continue to hold the shares.

Subsequent Trading: You can more readily tell if a pop or dip is temporary, and perhaps a trading opportunity, by closely watching the trading activity. For example, if a price spikes on huge volume, then you notice that the price advance and trading volume are both significantly lower the following day, the spike may be losing steam.

If a dip is on very low volume, it usually is erased as soon as a few bargain hunters jump on the shares. If the dip is on major volume, it may be a sign of things to come. High volume dips usually last, while low volume dips usually do not. Thus, high volume dips are usually a warning sign, while low volume dips are often a buying opportunity.

To benefit from the trading opportunities that pops and dips provide, you need to be able to quickly identify them, then react just as swiftly. Take up positions in those stocks that have dipped but will recover. Sell off shares in those stocks that have speculative price-spikes, while holding shares in companies that may be able to sustain their gains.

I provide an examination of short-term trading strategies in this chapter, in the discussions on Volatility Play Investing, Trading Windows, and Day Trading.

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