I hear from a lot of traders on social media who are struggling in this market, not being able to position size or manage risk correctly.
As I always say, some markets are for learning and some are for earning.
This is a learning market.
The thing is, that doesn’t mean you just sit back and watch the market pass you by entirely.
But there’s a way to do this methodically that balances risk and reward.
And it doesn’t mean completely reinventing the wheel.
In fact, I want to show you a few simple tweaks that any trader can use to remain an active player in the market while maximizing their potential gains.
Table of Contents
Identify the Broader Trends
It doesn’t matter whether I’m trading penny stocks or large caps. I always want to know the broader trend.
Take a look at Redbox Entertainment Inc. (NASDAQ: RDBX) for example.
In the last few weeks, this stock has seen one heck of a run. I drew a few arrows to highlight the general movement and trends.
Initially, the stock ran higher on heavy volume, traded sideways for a few days, then made another push higher. Finally, it made one last thrust before topping out.
The yellow horizontal lines identify the breakout areas.
Once any stock or market drops below those points and stays below, it’s changed the trend.
That puts the stock on a path to reach for the next important level.
Right now, we can see that RDBX is trying to make a move back higher. Yet, it can’t get enough interest to make its way back to the last breakdown area.
For now, that puts this stock in a somewhat bearish trend, especially with volume on the decline.
This same analysis applies to any stock and any chart.
So what’s different now from say a year ago?
Back in 2021, many of the meme and penny stocks would get bid up for days, if not weeks.
Now, I expect them to fail within days.
That’s why I may only take a couple of trades in a stock before I part ways with it.
They keep me up to date with the latest movers every morning.
But there’s another benefit to trading different stocks. It keeps me attuned to which stocks are moving — and which sectors.
That’s how I find additional trades like oil and gas penny stocks.
Keep Your Trades Small
One of the most common mistakes traders make is using the same position size in every market.
Right now, markets are extremely volatile and carry far more downside risk than in the past.
Even successful traders lower their trade size in this kind of environment.
As I tell my students, I want to cut losses quickly.
That’s much harder to do when I take an oversized position.
Don’t get me wrong, there’s a time and place for upping the ante.
But it’s not going long in a bear market.
Keeping a trading journal can help you figure out the best size to use by showing you the maximum drawdowns you’ve taken over a span of weeks.
If you aren’t sure what the correct size is, start small and work your way up. You can also use a demo or simulated account to collect the information you need before moving on to a real money account.
Look for Hot Sectors & Themes
Every market is governed by the latest trends.
Even when Covid sent nearly every stock lower in early 2020, stay-at-home plays like Zoom Video Communications Inc. (NASDAQ: ZM) soared higher.
Right now, oil and gas stocks are the hot ticket. But I have a feeling that’s going to change pretty soon.
The one area that tends to work for penny stock trading in any environment is biotech firms. They rely so heavily on news to boost them up, and there are so many companies, that there are usually a couple that start moving pre-market on any given day.
I’m not a huge fan of trading premarket. But these types of stocks can make excellent day trades if you know what to look for.
The Bottom Line
No matter what, I want to stay in control.
When markets aren’t conducive to my style of trading, I cut my size and focus on making good decisions and execution.
Don’t worry about what other people are doing. The only thing that matters is how you trade.
Now, finding the style that fits you can be tough. I bounced around for years until I came across my Supernova pattern.
And then everything changed.