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How To Trade Penny Stocks: 9 Key Strategies To Learn Now

9 Penny Stock Day Trading Strategies for Beginners

Usually, new investors hear about Warren Buffet and think that the best investing is long-term. However, this is not necessarily true especially when it comes to penny stocks. The way people like Warren Buffet trade can take several years or decades to come to fruition. There is a multitude of ways that people can invest in the stock market. One such way is day trading.

What Is Day Trading?

Day trading is basically buying and selling the same stock during a single day’s trading session. There’s also swing trading that involves buying and selling penny stocks within a few days’ time. The mindset behind the approach is that small gains every day will build up and become a large portfolio. The biggest problem that new day traders have is that they think they can go in without a strategy. This results in consistent losses instead of gains for the trader.


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Another problem with day trading penny stocks revolves around some brokerage firms. Not all of them are able to accommodate the volume of trades that day traders make. Some brokers like TD Ameritrade, Tradestation, StreetSmart Edge, and others have the ability to cater to day traders. The main things these penny stock brokers need to provide are good charting tools, real-time quotes, and take complex orders quickly.
The most annoying problem for new day traders mainly impacts those starting with smaller accounts. The Securities and Exchange Commission states that you may only place 3-day trades within a 5-day trading period. This is called the pattern day trader rule. Obviously, it is extremely limiting, but it only impacts those with account sizes under $25,000. It applies to all traders too; not just those buying penny stocks.

Penny Stocks & Trading Strategies: Harnessing Knowledge

Knowledge is a trader’s best friend regardless of whether you trade short or long term. Day traders must stay on top of overall market news, government actions impacting the markets, and individual company news.
First, make a list of penny stocks that interests you. Then, do research on the companies and the sectors they are in. Also, consider other things like economic outlook or major geopolitical factors at the time you make the list. There are so many resources on the internet that provide traders with the necessary information to make informed trades.

Penny Stocks & Trading Strategies: Set Money Aside In Case You Lose

Remember, day trading involves placing trades over the span of a day. This means you must allocate your portfolio properly to minimize risk and have enough capital to place other trades.
Smaller trades help traders lose less money and protect their portfolios from a very bad trade. Trade sizes vary on the amount of risk and portfolio sizes a trader has. Also, when you are first experiencing day trading you should use funds that you can afford to lose. A good alternative to this is paper trading.

Penny Stocks & Trading Strategies: Plan Your Day Around Day Trading



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Day trading is a serious time commitment. An effective penny stock day trader is one that puts in time and effort. This means that you are up an hour before the markets open planning your strategy for the day. During this time, you will also look for the best penny stocks to buy.
Also, you are analyzing what went wrong in bad trades an hour after markets closed. This means you should be ideally spending 9 hours, Monday through Friday, day trading and improving your craft. Furthermore, you have to do this every day to get a feel for market sentiment and current events.

Penny Stocks & Trading Strategies: Learn First Then Trade Later

It is okay to struggle when learning a skill for the first time. Most people will not succeed at day trading right off the bat because there is no exact science to it. You can either start trading with small sums of money or develop your strategies by paper trading.
The biggest downside of paper trading is that it will not prepare you for putting your money on the line. It is a completely different feeling and you will understand when you start to dip your toes into day trading. A good rule of thumb is that until you’re confident in testing your strategy, paper trading is your #1 friend.

Penny Stocks & Trading Strategies: Timing Of Trades

There are many different approaches that day traders make when placing trades. More experienced traders might place their orders so that they execute the moment the market opens. However, other traders like to evaluate the volatility and momentum of penny stocks before placing any orders.
Day traders must also be aware of when penny stocks make most of their moves. Typically, the beginning and ending of the day brings the most price action and surges in trading volume.

Penny Stocks & Trading Strategies: Utilize Limit Orders

This section comes back to the idea of trading with a sound strategy. If you have decided that the most you are willing to lose is $100 then stick with that. If you’re willing to lose a certain percentage, then that may be the better route to go as well.
The most effective way to guarantee that you adhere to this plan is by setting a limit order. A limit order to sell at the price equivalent to a $100 loss or set your percentage limit.
You will notice that as you become more advanced at day trading you will have many trades ongoing simultaneously. Limit orders will help you buy and sell at the prices you want when you are not able to monitor certain stocks.

Penny Stocks & Trading Strategies: Understand What The Actual Profits Are

No trader shoots 100%, never forget that. The above-average rate is realistically around 60%. The goal is to make more money on good trades than lose on bad trades. This is because of the game plan’s investors made to limit losses and take profits when earned.
Another thing to be aware of, even though penny stocks can swing 10% or more in a day, do not hesitate to take profits if you’re up. A penny stock can swing in the opposite quickly and result in you gaining 0 profits because you got greedy.

Penny Stocks & Trading Strategies: Keep A Cool Head At All Times

It’s okay to lose sometimes, it happens. However, you cannot let losses affect your psychological state when trading. This results in impulsive revenge trading that has no planning and will most likely cost you even more money. Just like you wouldn’t want a rattled surgeon doing your surgery, you should not be rattled when trading.

Penny Stocks & Trading Strategies: Stick To Your Game Plan

Remember how I said that penny stock trading takes time? This time mainly goes in to formulating your trading game plan. So why, just why, would you spend all that time to ignore the plan?
It is a waste of your time and money to neglect a plan you worked hard to formulate. The best day traders can work many trades to perfection. That’s because they have already created a plan. If your plan says sell at $1, then sell. If it says to buy at $2, then buy at $2 not $2.75 or $2.50. Greed is the biggest contributing factor to losing on what could’ve been a winning trade.

Penny Stocks: Hurdles To Overcome

One of the biggest things is fully understanding the time commitment it takes to become good a day trading. It takes a lot of practice and experience to come up with strategies you are comfortable with.


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An interesting thought to remember is that you are just a single investor in the entire market. You are going head to head against people who have been trading for decades and have resources from trading firms. These people almost always succeed with their trades in the end.
Then there is the government that cuts down your profit margin due to short-term gains taxes. These apply to any investments that you hold for less than 1 year.

Deciding Which Penny Stocks To Buy

Because penny stock day traders tend to use large amounts of capital, they focus on stocks with certain requirements. These qualifications require volatility, liquidity, and trading volume.
Volatility refers to how much a stock’s price will change during a given trading session. Because penny stocks tend to have higher volatility, day traders have a lot more potential for higher profits. However, this also means that there is a lot more risk and can result in heavy losses too.
Liquidity has a few components to it. The first one is understanding that the more liquidity a stock has, the easier it is to enter and exit. Typically, you want a stock with tight spreads. Having a tight spread means that the stock has a small difference between the bid and the ask prices.
Trading volume might be one of the most important factors to look at when trading penny stocks. Volume is the number of times a stock is bought and sold over a trading session. Traders will usually compare the average daily trading volume of a stock to its current volume to evaluate interest. Also, if a penny stock is lacking in volume, it can be very hard for a trader to get out of a position.

Penny Stocks & Trading Strategies: Candlestick Patterns

Through technical analysis and candlestick patterns, day traders can make precise game plans to get the most out of penny stocks. There are so many different technical indicators and patterns out there that most traders do not trade the same way. An important factor with technical analysis is volume because it acts as a confirmation for many indicators.
Doji’s, flag patterns, support and resistance lines are some of the most widely used patterns. A doji is used to show a potential reversal while flag patterns indicate continuation. Both patterns must have a surge of volume in order to properly execute. If you see the pattern form with rising volume levels, get ready to buy the penny stock.
The next step is to evaluate the price where a stock struggled to get past. This is known as resistance. Typically, resistance lines are good points to sell at because they tend to hold. However, with a strong stock, you could sell some shares at resistance and hold the rest for another move upwards.
If you want to learn more about penny stock patterns, we have a list of them:

Penny Stock Chart Patterns – How Do I Get Started?
Penny Stock Chart Patterns Every Trader Should Know [Top 5]

Penny Stocks & Risk

I feel like I have said this a million times now but, make a game plan. Given the number of times this has been stated you should understand its importance. One crucial decision when placing a trade is understanding how much you are willing to lose.
This is the part of the game plan where you decide your stop-loss order. A stop-loss order is placed to set a hard sell at a given price point. They are exceptionally good if you are looking at many stocks simultaneously or if a penny stock suddenly flips.
So how exactly do they reduce risk? Here’s an example that will make it very clear. Let’s say that you buy a penny stock at $1 per share and are willing to lose $0.20 per share. At the same time, you have trades places in 5 other stocks. You place a stop-loss order at $0.80 in the event the trade turns sour.


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After placing that order you go look at how your other trades are developing. But, during this time the other penny stock took a nosedive and is down 50%. Instead of losing $0.50 per share you only lost $0.20 and saved a huge hit of $0.30 per share.
The most difficult thing about risk tolerance is understanding your own. You should increase your risk tolerance little by little until you learn what you can and cannot handle. This is important because knowing your limits can save you money in the long run. It is okay to take a break if you had a bad trading day.

Some Closing Thoughts About Penny Stocks

Day trading penny stocks can most definitely be a viable trading approach. As long as you can dedicate time and some capital, day trading is worth learning. By no means is it an easy task to learn, but it definitely has its benefits. You get to be your own boss and the better you get the more money you will likely make.
To recap, always make a game plan before investing in any stock. Go in with a solid entry point and exit point. Also, make sure to set your stop losses accordingly. Research the companies you are going to invest in because they might have catalysts you were unaware of. Do not be afraid to spend time paper trading to develop your plan. If you have learned anything from this penny stock guide, day trading is not one size fits all. Don’t be afraid to test and experiment with strategies not discussed here.

* This article was originally published here

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