Hi, I am new to trading. Currently I only have about 1000 USD to invest in trading. Is there any way I can use this amount to make small profits regularly on a penny stock that costs about 10 cents or less? I am thinking of using mean reversion, but can't figure out how to apply it. Does any one know of a decent strategy that can be applied here? Thanks.
In one way (mathematically), the price of a stock is irrelevant. The raw return of a trade is L * (x / X - 1) where X is the original price entered at, x is the final price, and L is the leverage (negative for shorts). The new-to-old price ratio x / X cancels out price as a unit. In practice, other concerns apply, such as per trade minimum fee and the normally large slippage on penny stocks. With brokers in the US per share fees are quite popular for whatever reason, resulting in potentially huge overhead. Penny stocks do tend to be more volatile. However, in big companies you often get to use more leverage to compensate for that. What I'm trying to say is, if you do find a strategy which gives you a statistical edge in one or more penny stocks, then by all means use it. However, don't think penny stocks are the only way of achieving large equity swings... Especially ask yourself, why is the share price of that company 10 cents? Most companies try to keep their stocks higher than that because of various slippage issues (also due to said US brokers per share pricing habits) resulting in low share prices like that making trading difficult. As for a strategy, it's basically pointless to discuss any further without defining what time span you're going to trade at. Entirely different concerns apply at different time spans even though a universal concept such as mean reversion can happen both over multiple years as well as milliseconds. I personally don't trade penny stocks so I'm not going to continue further in this discussion (I'm sure someone else will be chiming in), just stating obvious things so we're on the same page here.
I am looking on short time frames. By this I mean I don't want any trade to last longer than a week. Ideally I would like to be a day trader, i.e if I enter a position in the morning today I would like to exit by the end of the day. I am thinking of placing limit orders that execute when the price touches the lowest price today and exit when it increases by a cent.
I did some analysis on this a while back. It is very hard to pick bottoms in penny stocks based purely on price/technical history. A penny stock that screens as having a momentum breakout will likely not have follow through. Run ups can be influenced heavily by manipulation or a 'pump' phase of pump-and-dump. If anybody is successful trading penny stocks on the long side, I'd love to hear about it. I wouldn't mind trading low priced stocks in my Fidelity HSA account if I could only come up with a decent methodology.
Liquidity issues with penny stocks can beat you up pretty bad. However, these can also be incredibly volatile. Two kinds of stock that I know of that you might see go up 5x to 10x intraday... pharm, and penny stocks. I find pennys to actually be a lot of fun to trade. I sometimes scan for under $5 stocks with lots of premarket volume and price action, then I just jump in for a few hundred shares at the bell. If it had crazy relative volume before the bell, something is going on with that one. Want to waste 20 minutes googling the company, or bet out on the action while it is happening? Yeah. I THOUGHT you would say that. But can you make a LOT of money? Nah. You need a hyoooooge position even with tremendous volatility, and you can't close out quick enough sometimes when you got a position of a thousand or thousands of shares. Or you are trading a dozen at once, and you have to watch these little guys close, because they can nosedive and stop you out in seconds, or nosedive and cost you considerable coin if you didn't use a stop. It is hard for me to closely watch three stocks at once if there is a lot of action. So that's a problem, yeah. Remember, ten cents per share profit on a hundred shares is ten bucks. Pretty small potatoes. Ten cents per share on a thousand is still only a hundred. Okay, so that isn't so bad. A couple or three like that and you got your day made. But if your stock is opening at ten cents, you might well be looking at two or three cents per share on a winner, so two bucks on a hundred shares and twenty on a thousand. You can make money faster mowing lawns. I don't really watch stocks under 50 cents, for that reason. A big position might be hard to get out of. A small one pays too small even if it takes off. Dollar to five dollar stocks can give you some stimulating action though. As for strategy you can just watch for a few consecutive bull candles and a pullback, and then the first bull candle after a possible bottom reversal, with good volume, make your play. Or do what I do, and bet out at the bell on a penny stock that was showing crazy volume and price action premarket. If it isn't showing you anything after a half dozen 5 minute candles, it probably isnt going anywhere. After the first hour, look for lots of up and down action, and set up to buy limit, at the apparent level of support. Let it trigger on the dip. Don't chase it. If you miss it, you miss it. No biggie. There will be other trades. Then set a stop below support, and a limit sell order just below resistance to take your profit. There has to be enough action to pay your commission on the trades, though. You are not going to be able to short these little guys. Just buy the low at support, sell the high at or just below resistance. If it breaks out, buy in again and if it looks good, lots of volume, buy in some more. Remember though, you still need to manage risk and be ready to bail cause these stocks are heavily manipulated. Watching for pet candle patterns doesn't work well for penny stocks, I have noticed. Go with the volume and price action. Keep an eye on five minute, and minute or less candles. Don't watch just one. Watch the price tick up and down, too. Don't wait for the next candle if you get a bad feel from the tick action... bail sooner rather than later, especially if you are holding a lot of shares. Its not strategy. It is just getting in the ring and slugging it out. YMMV. This advice is guaranteed to be worth exactly what you paid for it.
Don't be surprised when you buy penny stocks you are the only real buyer buying and when you sell you are the only real seller selling.
Yes if you are lucky enough to have gotten in before the "pump" stage and got out before the "dump" stage.