I see this figure everywhere from advice replies to broker margin-maintainence policy to books on trading as the suggested minimum price stock to trade. What is so special about a stock just because it's trading at $15+ vs. a $6 stock or a $8stock for trading? I'm not actually trying to buck the system. Obviously after seeing it repeated everywhere there must be well formulated reasons for the "rule". My guesses were as simple as "a safe market consensus of value" or perhaps some indepth study was done on the odds of profit vs. loss at this dividing line. Does anyone know some of the reasons? I'm curious.
No stock under $5 a share and it has to have an average volume of 1.5 million shares a day. "Cheap stocks are cheap for a reason."
Think about it. Let's take, say, a $10 stock. If it has a 10% move in one day (which is a huge move for a stock), that means it moves the grand total of 1 pt. For a $40 stock to move the same 1 pt. it only needs to move 2.5%, something far more common. And if the $40 stock happens to move 10% in one day that means 4 big pts. of volatility. Trading the single-digit stocks is most certainly doable, but you have to get into serious size (5K-10K) to get anything worthwhile out of most of the moves.
Maybe it has to do with commissions. A lot of brokers will charge you a ticket plus a per share fee (before the days of 1 cent/share EDAT) so perhaps this rule of thumb came about to keep your commissions at a reasonable % of your trade. Just a thought. Another reason could be that higher shares do perform better. Barron's ran a story on the amount of $1-5 shares trading on Nasdaq right now and provided a study that showed a correlation between returns and dollar value per share. With higher share prices outperforming their penny brethren, ofcourse. But this would be a long term 'investing' approach. The same article did point out that lower priced shares can be extremely volatile and suddenly jump into orbit, making them an appropriate trading vehicle (when the time is right ofcourse!).
I agree and disagree on this theory mainly because i think account size comes into play.I agree if you've got a large account and can buy size of the $40 stock, but disagree if your a smaller account size. 1000 of the $40 stock = $40,000 the same $40,000 on a $10 stock =4000 shares or a $5 stock =$8000 shares Profit on a $0.10 move on each? $40stock =$100 $10stock= $400 $5 stock = $800 What your saying is i'm more likely to get a $0.80 move on the $40 stock giving me my $800 that i got out of my $5 stock moving $0.10 ..Ok?? What gets me with this theory and i'm going to use for example someone that goes and buys 1-200 shares of a $40 stock because thats all they can afford. Are you guys still going to stick to the same theory or tell me i'd be better off hunting $5 movers?? If 1-200 shares of the $40 stock was all YOU could afford is that where you'd have them? Interested to see what you guys have to say. PDT rules have chased me down into working Otcbb, safer overnight holds/no afterhours/no upgrades/downgrades and some lovely moves.I know for sure i'm better off working these than a $40 stock.I guess i'm the other side of the coin.
A point which has been missed is downside risk; in the event of a highly adverse deterioration in orderflow for a 40 bucks stock, the downside could be very painful... but if you are trading a $10 stock, the downside will be less (but you pay up for this downside insulation through higher commissions because of the larger share size necessary to make dough out of a lower priced stock)... having said that, the upside potential is often much greater on a higher priced stock, so the argument goes both ways...
First i avoid equity under 5 $ for obvious reasons : not marginable = you cannot short unless youre serie 7 ( via bullet) Day trading is a very tough job if you have not the same weapons than the market maker you are dead before to start ( MM can short any equities) I prefer range 25-50 than 5-15 because now for very liquid equity the spread is often 0,01 cent. On a 5$ 0,01 is 0,20% on a 30$ it is only0,033% With 30k$ i can buy 6000 of the first one and 1000 of the second one. Often it takes the same time to go from 5 to 4,99 than to go from 30 to 29,99 ( in never takes 6 times more) but you lose 60$ instead of 10 in the second choice ( of course if it goes to 5,01 you win 6 times more ) And if you pay a per share commissions it is better to trade 30 than 5$.
I disagree Candle. While the downside on a $10 stock may be less in absolute dollars i.e., it's much less likely to go down $2 while that's not at all uncommon for a $40 stock, in percentage terms that would be a whopping 20% drop on the $10 stock and only a 5% drop on the $40 stock. And if you trade the $10 issues you are probably doing large size to try and get something out of the small moves, so the big percentage drops can be very painful....even though the stock didn't drop that much in dollar terms.
good topic to discuss, here's an example: it's often useful to differentiate between "wide clean line" types of intraday charts (more tradable, easier to spot cups/breakouts/fibo retracements/dojis etc in) than "chop charts" (more likely to churn, produce stops). Example: EBAY wider, cleaner lines, easier to nab +1/2 or better wins in, here's 5 recent days of action in it: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ebay&sid=0&o_symb=ebay&freq=7&time=3 than for example, RMBS, would be very difficult to get a decent win in this type of chart pattern: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=rmbs&sid=0&o_symb=rmbs&freq=7&time=3 I like to see at least 5% intraday volatility on stocks trading $20-$60 on volume of at least 1.2M shares/day avg vol as a criteria. Also, a technique I use it to determine the 'avg intraday trading range (AITR)" and use that as likely places to exit open wins and/or enter fades on pivots once a stock has traded there. (eg look at the most recent 10days' range, OHLC info etc). I like stocks with avg intraday ranges of 2-4 points.. most of the sub-$20 stocks have 1.5pts max range, which isn't enough to work with (unless you're scalping size, flipping 1/8s, or now we'd say flipping .125s lol). Ken