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How to Find Penny Stocks in 6 Simple Steps with a Stock Scanner #pennystocks #stocks #education

What Are Penny Stocks?

First, let’s make sure you’re clear on exactly what penny stocks are.

Penny stocks are on the smaller end of the stock market. They’re generally stocks with prices under $10 per share or so.

The penny stock market is made up of companies that are mainly in the developmental stage of business or have reasonably small single product businesses.

These businesses don’t often make great long-term investments because they often crash and burn, but some of the stocks can offer tremendous trading opportunities, if you know what you’re doing.
Benefits of Trading Penny Stocks

Why should you trade penny stocks? 

The potential volatility. Penny stocks prices often skyrocket or fall on single news stories or announcements that create hype around the company. If you know how to get onboard these monster moves and trade them properly, it’s possible to make quick, sizable gains.*

Lack of competition. When you trade penny stocks, you’re not competing with hedge funds, banks, and groups with billions of dollars. You’re often trading against unsophisticated retail investors. If you have even a basic trading strategy, you’ll often be well ahead of the competition.

What to Look for in Penny Stocks

While there are many ways to trade penny stocks, here are a few things many skilled traders look for before getting involved in a trade:

Hype and media buzz. Trading penny stocks often involves jumping on the price moves caused by hype and excitement. Many traders look for stocks that are receiving lots of attention in the media or online, causing traders to rush in and move prices up or down.

Increasing trading volume. When you see the volume in a penny stock start to increase, this often shows that more people are getting involved in the stock and can indicate that something big is about to happen.

Recent large price moves. Traders often scan for the top percentage movers of the previous session — stocks that have gone up down the most. These big recent moves often mean there’s been a lot of excitement around a stock, allowing the trader to follow the action for potential trades.

How to Find Penny Stocks in 6 Easy-to-Follow Steps

Finding great penny stock trades doesn’t have to be a slow and tedious process. Many traders actually enjoy the hunt!

We’ve broken the process down into 6 easy steps to help you get your head around how to find good penny stocks. Follow along …

#1 Setting Up a Stock Scanner

There are thousands of penny stocks traded in the U.S. each day, so it’s important you have a method for locating the trades with the highest potential.

That’s why we recommend that the first step you make toward finding penny stocks each morning is to use a high-quality stock scanner.

With the right scanner, you can quickly search the entire universe of penny stocks (or other stocks; it all depends on your trading preferences) to look for the criteria that fit your trading plan.

It’s up to you what you search for, but many traders look for things like volatility spikes, news stories, increased volume or previous big movers.

#2 Analyzing Chart Patterns

At this point, you need a way to find trades that offer great risk/reward opportunities, allowing you to risk the smallest amount of capital for the largest potential gain. To do this, most traders rely on chart patterns.

Price and volume patterns on the chart can give you insight into the psychology of other traders involved in the stock.

By viewing these patterns on the chart, you can see areas of fear, greed, excitement, and levels that historically cause traders to react.

With this insight, you can build a trading plan aimed to take advantage of when the market is signaling an impending potential price move.

#3 Choosing Technical Indicators

If you ask 10 traders about how to pick penny stocks, you’ll get 10 different answers.

While most traders start with chart patterns, some traders like to further refine their trades by using technical indicators to show deeper insight into the action on the chart.

Technical indicators take price and volume data and manipulate it in ways to show things like momentum, recent strength, or lack of volatility.

Maybe that sounds super-technical, but it’s often as simple as showing the average price over the past 20 trading days (moving averages) or showing the difference in volume traded between up days and down days (OBV indicator).

If technical indicators sound interesting to you, we suggest you test a bunch of them when you’re developing your trading plan.

#4 News Catalysts

It’s common for newbie traders to wonder how to find penny stocks before they spike. Doesn’t it sound great to be able to buy a stock just before it spikes? It’s not out of reach!

Watching for news catalysts is one of the best ways to jump on these moves before other traders pile in and push the price up.

News catalysts are things like earning announcements, product updates, news stories or even major buzz on Twitter or online forums.

These catalysts often entice traders to jump into or out of a stock and often cause price moves.

If you keep on top of news catalysts and you’re able to act fast, you can potentially get in front of the herd.

#5 Identifying Trends

Stocks are always either in a range (bouncing up and down) or in a trend (making consistent moves in one direction). The easiest money is often found when the stock is trending.

When you trade with the trend, it’s similar to a surfer jumping on a big wave with their surfboard. They simply need to ride the wave until it starts to die out, then jump off before it crashes.

On a stock chart, we identify trends by seeing consistent higher highs and higher lows for an uptrend, or consistent lower highs and lower lows for a downtrend.

#6 Check the Trading Volume

Imagine you locate a penny stock trade with amazing potential … it has great fundamentals, a powerful news catalyst, and a beautiful chart pattern.

You open your order entry screen up as the market opens, ready to buy 10,000 shares because you think you’re convinced the price will rocket during the day.

To your horror, you find that hardly anyone is trading the stock. You see the occasional trade of 100 or 200 shares, but there’s no one there to sell you the 10,000 shares you’re after.

Frustrated, you sit there through the day, watching the stock make the exact 20% gain you’d envisioned, but due to there not being enough trading volume, you had to watch from the sidelines.

This is a common occurrence for many new penny stock traders. Don’t let it happen to you.

It’s no use finding the greatest trades if the stock doesn’t have enough volume traded every day for you to get in and out of a position!

This is why you need to filter all your trades for stocks that have enough trading volume to allow you to easily take a position size you require — it can save you a lot of heartbreak and help protect your trading capital.

What to Do After You Find Top Penny Stocks With a Stock Screener

There’s more to using a stock screener than just scanning for a list of stocks and making trades.

You also need to make the trades, manage your risk, determine your exits, and manage your trader psychology.

Here a few key tips for turning your stock scan results into your top plays …
Stick to Your Trading Plan

A successful trading career doesn’t mean you make a single good trade and call it quits.

You need to make smart trades over and over again as the market shows opportunity, then manage them correctly. To do this, you need a trading plan to follow.

trading plan is a well-researched method that gets you into trades that offer great risk/reward opportunities while keeping you out of bad ones.

Your trading plan should also include:

  1. A set strategy on how much to risk on each trade
  2. Where to place your stop loss
  3. When to add to a prime position
  4. And guide you in just about every trading situation you come across

Bottom line: Your trading plan is everything. It should be developed before you risk a single cent in the market.

Important note: Be sure to test everything in your trading plan carefully to ensure that it’s a good fit for you in the long run. It could make the difference between winning and losing trades!

Once you’re confident in your trading plan, make sure to follow it. Know that the market will play tricks on your mind and you’ll often feel like deviating — don’t do it! Trust the research that you’ve put into the plan.

Create Stock Watchlists

As you become more involved with the market, you’ll likely accumulate a large list of stocks that look interesting …

… How to keep on top of it all? Build a watchlist (one or more).

A watchlist is simply a list of stocks that you build that allows you to focus on the ones that show the greatest potential.

You can keep one master watchlist, or watchlists for certain sectors like pot stocks or biotech companies, or you can keep watchlists showing certain chart patterns or stocks with increasing volume — it’s all about finding the process that works for you.

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1 comment:

  1. Trading Methods: As with other types of stocks, penny stocks are normally bought and sold through a stock broker. Because of the low trading price and high level of risk, some brokerage houses will not handle penny stocks. For most people interested in these stocks, buying and selling through an online brokerage house is the best way to go, due to the significant cost savings normally offered. Costs are minimal and there are not usually any restrictions on the purchase of penny stocks.