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Trading penny stocks can be dangerous due to their illiquid and unpredictable character. Furthermore, they are vulnerable to pump and dump scams and other fraudulent tactics. However, a penny stock might be extremely profitable for a bargain hunter. So, you might be wondering whether you can swing trade penny stocks.
Yes, you can swing trade penny stocks if you understand what you’re doing. Most traders avoid penny stocks because of their volatility, which is also what qualifies them for swing trading. The fast swings of penny stocks provide good entry and exit points for a dedicated swing trader to capitalize on short-term trends.
I suppose you’d like to know how to swing trade penny stocks. So let’s get started! This post will cover the following:
- What Swing Trading is
- What you should understand about penny stocks.
- Why can you swing trade penny stocks?
- The proper way to swing trade penny stocks
- Strategies for swing trading penny stocks.
- Four blunders that beginners make while swing trading penny stocks.
- Tips penny stock swing traders should follow
What is Swing Trading?
Swing trading is a speculative trading method that seeks to profit from medium-term market changes, such as the price swings we observe on a daily basis. This trading approach falls somewhere between day trading and buy-and-hold investing. The main distinction is the holding time.
Swing traders strive to profit on upward and downward “swings” in the price of a security within a bigger general trend. However, competent swing traders do not try to make a large profit on a single trade, but rather to accumulate a series of tiny victories that add up to considerable long-term gains. For example, a buy-and-hold investor may have to wait six months (or even a year) to earn a 25% profit on his portfolio, whereas swing traders may earn 5% weekly gains and outperform the other trader’s earnings over time.
The goal of swing trading is to catch individual price swings on a daily timescale rather than riding the entire trend with several up and down swings. As a result, the idea is to spot the beginnings of a new price swing, particularly an impulse movement in the direction of the trend and execute a trade to ride that swing to completion before exiting the trade or switching directions when the opposite swing begins.
The goal of swing trading is to catch individual price swings on a daily timescale rather than riding the entire trend with several up and down swings. Thus, the objective is to spot the beginning of a new price movement, particularly the impulse swing in the direction of the trend and enter a trade to ride that swing to its completion but then, hop out of the trade or switch direction when the opposite swing starts.
Swing traders are similar to day traders, but there are some notable differences between the two. First and foremost, the periods for each trading techniques differ. Day traders do not maintain their positions overnight, whereas swing traders can hold them for weeks. Day traders can enter and exit deals within minutes or hours, but swing traders typically hold positions for days or weeks.
Swing traders aren’t particularly concerned with intraday price changes caused by news announcements. However, their holdings may be impacted by overnight gaps caused by strong price fluctuations occurring at night or on weekends.
What You Should Understand about Penny Stocks
Penny stocks trade for less than $5 in the United States, but for less than £1 in the United Kingdom. These are shares of new companies or those with a small market capitalization. Penny stocks may also represent shares of companies that were once strong but have done poorly in recent years.
Penny stocks can be traded on exchanges, although the majority are traded over the counter, commonly known as Pink Sheets in the United States. Though penny stocks are inexpensive, their trading volume can be low, limiting liquidity. Penny stocks typically have larger bid-ask spreads compared to larger company equities.
Low liquidity might make it difficult for dealers to sell their stocks at their desired price goal. Also, stock values can be extremely erratic. Penny stocks are vulnerable to manipulation since they are cheap, have minimal liquidity, and receive little attention and scrutiny from authorities.
If you are new to stock trading, you should avoid trading penny stocks. The chances of blowing your trading account are significantly greater than hitting a home run. Despite this, some traders make significant returns from swing trading penny stocks.
Why you can Swing Trade Penny Stocks
While it is not recommended that a beginning trader trade penny stocks, experienced traders can do so if they like. Penny stocks are ideal for short-term trading, especially swing trading. The following are some of the reasons you can swing trade penny stocks:
- Volatility: Penny stocks are extremely volatile, with movements lasting only a few hours or days. Penny stocks are ideal for day and swing trading due to their ability to make significant changes within a few trading days. Thus, excessive volatility in penny stocks might be advantageous for a skilled swing trader.
- Easy to access: There are online bargain brokers that allow you to trade penny stocks. Some of them are Interactive Brokers, TD Ameritrade, Charles Schwab, and Fidelity. Brokers such as TD Ameritrade and E-Trade allow traders to open accounts with minimal deposits and trade penny stocks. Thus, penny stocks are easily accessible to traders with tiny balances. A swing trader does not require a large capital to begin trading equities. A trader may acquire thousands and millions of shares of these stocks for a few thousand, if not a few hundred, dollars, which is not doable with higher-priced stocks.
- Low prices: One of the primary advantages of penny stocks is that they trade at incredibly low costs. Normally, the SEC uses the $5 mark to define them, but many of them trade for pennies a share. As a result, a trader with a modest trading capital can purchase a large number of penny stocks at once.
- Potential for huge returns: Penny stocks have the potential to yield massive returns. Because penny stocks trade at low prices, if things go well and the stock you purchased doubles, triples, or even exceeds the price you paid for it in just a few days. Profits can be substantial.
However, in order to properly swing trade penny stocks, you must first understand certain concepts.
The Proper Way to Swing Trading Penny Stocks
There are two techniques to stock trading: fundamental and technical analysis. Swing traders that utilize fundamental analysis base their trading decisions on a company’s financial performance, thus they look at the balance sheet, income statement, and profit and loss statement, particularly after an earnings report.
On the other hand, those who rely on technical analysis use charts to find out the direction of the trend as well as the position of support and resistance levels. Traders that rely on technical analysis do not consider the company’s financial performance.
When swing trading penny stocks, it is advisable to employ technical analysis rather than fundamentals. Because penny stocks are volatile, they may undergo significant price movements with no underlying reason for the change. Furthermore, because penny stocks receive less attention from most investors and experts, their fundamentals are rarely examined, making it difficult to identify their true value. Penny stock values are rarely affected by fundamental considerations.
Strategies for Swing Trading Penny Stocks
Penny stocks are a distinct type of investment, and not all methods work with them. There are just a few tactics you may employ for swing trading penny stocks. Here are some of them:
- Momentum: The momentum approach, also known as the trend-following strategy, seeks to trade in the direction of the trend following a brief pause in price movement. The strategy is to trade the impulse wave in the direction of the trend and exit when a pullback occurs, which can wipe out profits. To apply this approach to swing trade penny stocks, you must first understand how support and resistance levels function, as this are where you will seek for trade opportunities. Penny stocks do not normally follow long-term trends; instead, they take random walks in either direction depending on where the momentum is. However, some major support and resistance levels are still respected, therefore when the price bounces from a key level, consider placing a trade.
- Buy the rumor and sell the new: Buy the rumor, sell the news is a common penny stock trading method. This technique aims to benefit from pump and dump schemes rather than becoming a victim of them. When the news breaks, the scheme’s organizers will have already pulled out of the market, so you should sell as well.
Four Blunders Beginners make when Swing Trading Penny Stocks
Swing trading penny stocks can lead to more frequent mistakes than other types of trading. Anyone can make these errors, but beginners are more likely to get caught up in them. The four most typical swing trading blunders made by beginners are listed below.
1. Not starting small
Some beginner traders believe that equities will only rise. Unfortunately, they will learn the hard way. Penny stocks show more falls than rallies. Swing trading penny stocks puts the trader at a disadvantage. Going all-in would further complicate matters because the stakes are now enormous, which can lead to rash actions that end in losses. It is generally advisable to begin with a small percentage of your trading capital.
2. No trading plan
Swing trading without a plan is similar to driving without headlights on. Trading volatile assets, like penny stocks, increases the risk of loss. There must be a precise plan outlining entry and exit points. This should be backed up by stop-loss and take-profit targets.
3. Overtrading
Swing trading presents the temptation to overtrade. This has been compounded by the emergence of commission-free trading apps, which enable traders to post as many trades as possible in a single day. Overtrading demonstrates a lack of control and trading plan, and it only results in a loss of money.
4. Hanging on to losing trades
There is no reason to hold on to a losing trade; penny stocks are more likely to continue sinking than to turn in your favor. However, swing traders may refuse to cut their losses and continue to hold a stock due to fear or greed. This will just result in greater losses and, more significantly, will lock up funds that could be utilized to make a new deal that is potentially more profitable. The best rule in trading, particularly penny stocks, is to cut your losses fast in accordance with your trading strategy.
Tips that a Penny Stock Swing Trader Should Know
Here are some suggestions for swing trading penny stocks:
1. Avoid OTC/Pink Sheet-listed penny stocks
Penny stocks traded over the counter are not as well regulated as those listed on exchanges. As a result, they are more vulnerable to unethical trading techniques including price manipulation and pump-and-dump schemes.
2. Avoid Promotional/Meme Stocks
Some corporations pay to have their stocks pushed on social media in order to drive up prices. This is a very typical practice among penny stocks. You may believe you have discovered the next Tesla or Apple, unaware that it is the work of promoters attempting to sell you awful stocks. When swing trading penny stocks, avoid stocks that look to be heavily promoted on social media.
3. Do not trade penny stocks with low volume
Without liquidity, it would be difficult to profitably trade penny stocks. Liquidity determines a stock’s bid/ask spreads, which influence the buy-sell price and your ability to close your trade whenever you choose. If a penny stock is illiquid, you should avoid it since you may not have other interested parties to deal with when you wish to liquidate your stake.
4. The hit and run approach
Swing trading is profitable when you adopt the hit and run strategy. This entails trading for a short amount of time and earning little profits from each trade. This decreases the danger associated with holding your investments for too long. Set profit targets so that when they are met, you can exit your transactions.
5. Trade one-day at a time
Always approach each new trade with a fresh mindset and viewpoint. While historical data might be useful, keep in mind that each market condition is unique. So, trade your setups when they occur and accept whatever the conclusion is.
6. Look for trends and patterns
The trend is your buddy, but penny stocks rarely show any pattern. As a result, you may need to use patterns and volumes as a compass to navigate the market. They tell you when to enter and exit a trade.
7. Watch out for pump and dump schemes
Penny stocks are well-known for their pump and dump methods. Paying attention to charts and trading volumes might help you identify trends from afar. The rule is to buy rumors and sell news.
8. Cut losses quickly
Successful swing trading requires a strong risk management approach, particularly when trading penny stocks. While you never truly lose money until you sell, you must know when to cut your losses and exit an unfavorable investment. Because penny stocks can undergo very abrupt price swings, you should utilize stop loss orders to swiftly reduce your losses. Keep in mind that penny stocks are frequently illiquid, so there may be some slippage.
9. Do your own research
Swing trading penny stocks requires study in addition to technical analysis. The better the fundamentals, the more likely the stock will be a good investment.
Final Words
Swing trading penny stocks is not for the faint-hearted. It needs a high-risk tolerance as well as the capacity to respond swiftly to market fluctuations. However, if you believe you have the ability to swing trade penny stocks, develop a simple method for finding profitable trading chances. While technical research is useful for identifying trade settings, fundamental analysis may be required to select the best penny stocks for swing trading. To simplify the process, consider subscribing to a swing trading signal, which recommends stocks to buy at specific times.
Frequently Asked Questions
What are penny stocks, and how are they defined in the U.S. and U.K. markets?
Penny stocks are securities that trade for less than $5 in the United States and less than £1 in the United Kingdom. These stocks often belong to young or small-market-cap companies, although they may also comprise shares of previously strong corporations that have underperformed.
Why are penny stocks considered risky for new traders?
Penny stocks can be traded on exchanges, although the majority are traded over the counter, such as the Pink Sheets in the United States. Low liquidity is prevalent due to low trading volumes, resulting in greater bid-ask spreads than larger business equities. Penny stocks are risky for beginning traders because of their limited liquidity, susceptibility to manipulation, and extreme volatility. New traders are more likely to lose their trading account than to make substantial profits.
Why is technical analysis preferred over fundamental analysis for swing trading penny stocks?
Technical analysis is favored for swing trading penny stocks because their volatility can produce sharp price movements in the absence of strong fundamental considerations. Furthermore, penny stocks receive less attention, making it difficult to determine their fundamental value.
