Jumping into the world of stock trading, and more specifically, penny stock trading, can be a daunting task.
Okay, first thing’s first- You’re going to need a trading account of some kind, and access to trading data.
Level II Quotes allow you to view the depth of the market on each stock, for example: The number of buyers on the bid, and sellers on the ask, and the prices at which they are bidding and selling. Over-the-Counter Stocks are very different from stocks that trade on higher exchanges. There are instances when a single trade can have a significant impact on the price of a stock.
It can be difficult to find companies at this level with genuinely effective business models, and a lot of cash on hand, which is why most penny stocks are considered speculative in nature. Things that can have a negative impact, are insiders on Wall Street who have been known to manipulate stock prices, people who make money shorting stocks (betting that a stock will go down), and companies that suddenly dilute their own pool of stock by increasing the number of outstanding shares without adding value to the company.
It is impossible to predict what a penny stock will do all of the time, given all of these potential pitfalls, but a smart trader can still get in and out with a profit even in the most hectic of markets.
50DMA (50-Day Moving Average): A breach of this point on a stock’s chart is generally considered a bullish indicator, also referred to as a breakout. 200DMA (200-Day Moving Average): Passing the 200DMA is a definite confirmation that the stock has been on a bullish run, however, it is at this point that stock can often get top-heavy, and lose momentum. We constantly look for stocks that continuously raise the bar on both their lows and highs, as this is very often a bullish confirmation. These various chart patterns are not a guarantee when it comes to predicting the movements of a stock (like we said before, there’s no real way to do so), but with proper due diligence, and understanding of market mentalities, a healthy working knowledge of common setups and indicators can really give you a leg up.
In our latest Trading School lesson for beginning stock traders, we will explain the two primary order types, Market and Limit, as well as the different parameters that can then be applied through the use of various other order instructions. As a result of these loose guidelines, Market Orders are almost always filled, provided the stock is liquid.
Using limit orders, you are afforded a measure of control to avoid paying more than you want for a given stock. Now, we’ll look at some of the order parameters that include instruction for the automated sale of a stock.
A Stop-Loss protects the purchaser from damaging losses by allowing one to set a price target lower than the current market value that would trigger a sale, should the stock fall to that level.
Some might argue that one should always use Stop Orders as a precautionary measure against unacceptable losses. A Trailing Stop Order serves the same purpose as a regular Stop Order, but instead of a specific price acting as the sell-trigger, it is a set percentage of the market price. A Day Order, unlike a GTC, only remains open for the remainder of the trading day on which it was placed. Looking at the history of the stock is important as well, both on the news wires and the chart. Newby II Wyoming Park High School student Nick De Longpre turned a theoretical $100,000 into nearly $2 million in a stock market simulation game at school.
You can retain a private broker, and should if it is feasible for you, but most people nowadays handle their penny trading via online platforms, of which there are a plethora. The bottom line: it is extremely difficult, and inadvisable to trade penny stocks without access to real-time Level II Quote data. Penny stocks are not generally long-term investments, and more for rapid trades that net quick gains. Stocks currently trading above their 50DMA can sometimes have less resistance preventing upward momentum.
The resulting line is plotted on the chart, and can give you a good idea as to whether the stock is overbought, oversold, or somewhere in between. Market Orders can also be thought of as “open-ended”, in that they contain no instructions for the sale of the stock. Like Market Orders, basic Limit Orders only contain instructions for purchasing a stock, not selling.
Instead of having to adjust your Stop every time the stock trends up, the Trailing Stop will “follow” the price up, and remain set to trigger a sale should the price fall a specific percentage below the market price. A microcap stock is likely to be very volatile and highly risky, yet can return rapid gains at a moment’s notice.
It can sometimes be easier to gain a better feel for a certain stock by improving your frame of reference; it never hurts to check out the competition. Check back for future updates with more information on how you can take some of the mystery out of the wonderful world of penny stocks.
The task of understanding Due Diligence in the context of stock trading and how it’s done can be daunting, and seem overly complex. It is important to determine the level of risk which is acceptable to you as you pursue your investment goals, and understand that it changes from stock to stock. Companies that operate in the same industry sector as that of your target stock can provide a more comprehensive picture of its past, present and potential future. It offers much more beyond the trading term definitions for which we’ve referenced it here.
In this Trading School Series, we are going to start along the path to understanding how to conduct Due Diligence.
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