The time is high … for high-volatility penny stocks, that is.
High-volatility penny stocks are the secret to my trading success. These low-priced stocks are characterized by rapid and significant price shifts. Yes, they can be risky … but they can also potentially have opportunity as well.
As I’ve learned over time, if you play things right, do plenty of research, and have a good trading plan in place, you can take advantage of the rapidly changing stock prices, both on the way up and down.
So how do you make these fast-moving stocks work for you? Here, I’ll explain high-volatility penny stocks in detail, including how to identify them, the benefits of trading them, and how to approach this style of trading.
Download the key points of this post as PDF.
Table of Contents
- 1 What Are High-Volatility Penny Stocks?
- 2 Key Benefits of Trading Volatile Stocks
- 3 High-Volatility Penny Stocks: How to Easily Find Them
- 4 The Bottom Line
What Are High-Volatility Penny Stocks?
So … what is high volatility in penny stocks? To help you understand, let’s break down all three parts of the phrase.
- High: Greater quantity than normal.
- Volatility: This refers to the price range variation of a stock within a finite period of time, such as a day, week, month, or year.
In the context of a stock, if the price is spiking high and low and moving quickly and/or erratically, it would be considered volatile.
Oh, and just to clear up any confusion, volatility can be moving in either direction.
- Penny stocks: Low-priced stocks. In spite of the name, they’re not all literally sold for pennies. Personally, I’d consider a penny stock anything trading for below $5 per share.
In a nutshell, high-volatility penny stocks are low-priced stocks that are experiencing unusually rapid and significant price fluctuations. Typically, this is within a short period of time — these big shifts can occur not only throughout a single day, but even within hours or even minutes.
Examples of High-Volatility Penny Stocks
In seeking out high-volatility penny stocks, what exactly are you looking for? Here are some examples of the key characteristics that will point you in the right direction:
- Rapid price movement. When it comes to penny stocks, you’re not necessarily looking for stocks that are moving slowly and steadily over months. Rather, you’re seeking out stocks that are spiking rapidly, even within the course of a day.
The stocks that are moving quickly are the ones that you want to examine as a day trader, as these are the ones that provide the most opportunities for potential gains.
- Biggest gainers and losers. If a stock has been a big gainer or a big loser, it could be a sign that it’s a high-volatility penny stock.
Often, a big gain or loss is a good sign that the stock in question is experiencing volatility. Of course, this won’t always be the case, as it could be a specific catalyst or piece of news that is causing a one-off price fluctuation.
- Activity. If a stock isn’t moving much at all, it’s safe to say there’s not much activity going on. This means there are fewer buyers and sellers.
The problem here is that if you take a large position, you could find yourself in the highly disadvantageous place of not being able to unload your shares due to lack of demand.
With little activity on the stock, there’s likely little volatility. So if you’re looking out for high-volatility penny stocks, be sure to consider the volume and activity surrounding a security.
Key Benefits of Trading Volatile Stocks
This is important: volatile stocks have a higher level of risk than more stable and slow-moving stocks.
For some traders, this can be a real turn-off. Why would you want to engage in a risky investment strategy? The answer is that with risk comes reward. Here are some of the specific benefits of trading volatile stocks:
Opportunities for traders with smaller accounts. There’s a reason why both volatile stocks and penny stocks are dismissed by many affluent investors.
The volatility makes them undesirable as they are scared of losses, so they focus on what they deem more investments that are slower moving. Of course, they have large accounts that allow for larger investments and slower movement.
If you have a small account, high-volatility penny stocks provide you with the opportunity to grow your account quickly.
The fact that there are fewer institutional investors involved means there’s less competition and plenty of room for traders like you and me to grow.
This is how I earned my money, and it’s the method of trading I focus on most as a teacher/mentor with my Trading Challenge students.
Works in bull and bear markets. There’s a reason why I remained profitable during the 2007/2008 financial crisis.** That’s because I was willing to embrace volatility in stocks.
With high-volatility stocks, you can potentially profit both on the way up and on the way down. It’s all about following trends and patterns.
When the market is strong, I’ll buy stocks; when it’s weak, I’ll short sell them. This allows me to take advantage of volatility, regardless of the direction the stock is going.
This is one of the key lessons I teach in my Trading Challenge. It doesn’t matter if the prices are going up or down. It’s your ability to follow the price action and patterns that will help you mitigate risk and make intelligent trades.
Take advantage of undervalued stocks. Sometimes, stock prices go down for reasons that have nothing to do with the company in question. It could just be the market, or there could be a negative catalyst affecting one company which brings down other stocks in similar sectors.
If you’re willing to do your research and separate the wheat from the chaff, you can stand to benefit big time as these undervalued stocks rebound and make huge gains.
Attractive entry prices. Let’s be real. One of the biggest advantages of penny stocks in general is their low price. They’re accessible to investors of all levels, even if they have a starting account of $500.
The entry price of penny stocks, particularly highly volatile ones, will be attractive. This can make it not only possible but highly tempting to just buy a ton of shares and see what happens, but I want you to take a more calculated approach.
You need to put together a detailed trading plan so that you’re not just betting that this $0.73 stock will go up. Even though your losses might be small, they mount over time, and it is important to set up good practices.
Scale up your technique. Whether you’re trading a stock that costs a dollar per share or $1,500 per share, the basic ideas of picking a stock remain constant.
You need to be looking at the company in question with your fundamental research, and to be researching the stock’s action with technical research. This is how you identify companies that have great growth potential yet steady enough growth to warrant a buy-in.
As your knowledge and your account both grow, you can scale up these techniques. This means that the same skills you develop trading high-volatility penny stocks can be applied to larger positions in the future.
High-Volatility Penny Stocks: How to Easily Find Them
Curious about how to locate high-volatility penny stocks? Good news: it’s not rocket science. Follow these tips …
#1 Figure Out Your Risk Tolerance
Do you know your personal level of risk tolerance? This is hugely important when trading high-volatility penny stocks, because they have a higher risk level than investing in a blue-chip stock. But remember: this is why they can potentially deliver such handsome profits.
Here are two things to consider regarding risk tolerance and high-volatility penny stocks:
What is your goal? Is your goal to save for retirement over the next 30 years? In that case, penny stocks might not be quite the right direction for you. But if your goal is to grow a small account as quickly as possible, then high-volatility penny stocks could be just the ticket.
How big is your account? In terms of risk tolerance, your current financial situation may affect it. You may want to grow your account aggressively, but you never want to be foolish with your funds.
If you have a small account, it doesn’t mean that you shouldn’t trade highly volatile penny stocks, but it does mean that you need to start slow, taking small positions and working your way up incrementally.
Paper trading can be a great tool for traders who want to explore volatile stocks but haven’t built up the risk tolerance. It is a way of virtually trading stocks with an account size of your choosing. It’s just like real trading, but without real money.
With paper trading, can test out techniques and get your feet wet in the market of volatile stocks before investing your hard-earned capital. This can help you become more confident in your abilities, and more comfortable with the risk involved.
#2 Use a Stock Screener
Stock screening is just what it sounds like: a method used to narrow down your choices of stocks to consider trading. After all, there are literally thousands of stocks out there, and you can’t chase them all.
A stock screener is your best friend when it comes to locating the most appropriate stocks to fit your style, risk tolerance, and prowess as a trader. You can divide stocks by sector, by percentage gainers, and focus on float and volatility.
StocksToTrade is the best of the best. This trader-created platform is not only intuitive, but it includes tools that you really need to choose strong contenders. And I helped design it, so it’s especially cool.
In particular, when looking at high-volatility penny stocks, you’ll be looking for markers of volatility.
Beta is one popular filter to measure volatility. It’s a way of figuring out the volatility of a particular stock as compared to the market at large.
So, say a beta of 1.0 is the standard market volatility. If a stock has a beta of 1.2, it’s about 20% more volatile than the market at large. If it has a beta of 0.5, it’s 50% less volatile than the market.
In this case, you’d be looking for a beta higher than 1.0, because you’d generally be looking for greater volatility than the market.
Of course, you need to remember that figuring out that a stock is volatile isn’t quite enough to make it trade-worthy. It’s just one of the many steps involved in choosing a stock.
#3 Create Your Penny Stocks Watchlist
Once you have a short list of penny stocks you’re considering, you’ve basically created a watchlist.
How you keep track of your watchlist is up to you. For example, you might choose to maintain and monitor it on your trading platform, as many of them have this capability.
However, many of my best students keep a more detailed spreadsheet for their watchlist so that they can really dig into their choices. You can learn more about my star student Tim Grittani’s watchlist making method in this video.
To clarify, your watchlist is NOT a list of stocks that you will definitely trade. Rather, it’s a short list of stocks that you’re considering trading if and when they meet your specific criteria.
#4 Technical and Fundamental Analysis
Once you have a strong watchlist, you want to have a plan in place to help you decide when it’s time to make a trade. So how do you create a plan, determine entry and exit points, and take it to a point where your risk is more calculated?
By performing technical and fundamental analysis.
Ideally, you want to find the stocks that have the best combination of reliable pattern, good fundamentals, and high volatility. Your research will help you determine this.
Fundamental analysis has you looking through the company’s financial information, news releases, and plans for the future.
You’ll be looking at things like their earnings reports and seeing how the company is doing in a large, overarching way, because this has a direct impact on the stock price now and in the future.
Technical analysis is where you hit the charts hard and look at the historical data behind the stock’s price movement. When you look at its chart, can you see distinct patterns? I love patterns and consider them one of the most important things when choosing stocks.
Be sure to look at daily, weekly, and yearly charts to try to discern any patterns that look like they might be repeating.
Once you’ve done this for all of the stocks on your watchlist, you probably have some favorites emerging. Hopefully they have high volatility and nice, clean patterns.
If you have a few really strong contenders, you may want to outline a trading pattern for each of the stocks, so that if the criteria you’ve set have been met, you’ll be ready to rock and roll and execute the trade.
This will help you be prepared for when the time is right to make the trade.
#5 Follow Your Stock Indicators and Favorite Patterns
Next is the hard part: the watchful waiting. You have a strong watchlist, and you have planned your entries and exits. You have a potential trading plan for a few strong contenders.
Now, you need to watch and wait and see what they do. You can set up alerts on different stocks so that you can monitor when they break the support / resistance that you’re looking for, or when they make moves that you believe makes the trade worthwhile.
You might even set up a limit order so that once the stock price reaches your desired level, you can execute instantly, even if you’re away from your computer.
It’s important to keep on monitoring what happens with a stock, because the landscape is ever changing. What happens to a stock as you monitor could make a trade more appetizing, or could make you want to walk away.
Even if you never end up trading a stock you’re following, you’ll always learn something from monitoring it.
#6 Look For News Catalysts
The most volatile penny stocks typically have catalysts that are affecting the prices, so it’s important to keep updated on the news.
Many trading platforms conveniently link to the latest headlines right on the ticker’s page, or you can enter the ticker in a website like Yahoo Finance to pull up recent headlines, news, and analyst reports.
Be sure to keep updated on these things on a regular basis, because you may pick up on news or events that could have an impact on the price — and your decision to make the trade.
For instance, if you’ve been waiting for an entry point for the stock and you hear big news that the company has a big new merger or an exciting new hire, this could be the time to jump on executing the trade while the price is right.
On the other hand, negative news could provoke you to decide to short sell, or might make you rethink the stock in question.
Remember, though: Just because a stock is on your watchlist doesn’t mean you ever have to trade it!
Sometimes a catalyst will come along that disrupts the pattern. If you don’t feel confident and like you’re able to manage your risk in a position, it may be best to remove a stock from your watchlist for now. Sometimes the best trade is no trade.
#7 Improve Your Trading Skills
When you improve your trading skills, it’s like a rising tide that lifts all boats. That is to say that the caliber of every trading technique, including finding worthwhile high-volatility stocks, will improve.
Day trading classes can be hugely helpful in teaching you the necessary basics so that you can focus on trading rather than trying to figure out the meaning of different indicators and trying to figure out how to create a watchlist.
Can you teach yourself how to trade without assistance? Yes, but it will be slow and most likely, you’ll make some mistakes along the way. I can tell you this with confidence as I am self-taught but believe I could have become successful far faster with the right education.
I taught myself how to trade, but I made a LOT of mistakes along the way. Mistakes are not a bad thing, especially if you learn from them. But why make mistakes when you could seek out an education that would help you avoid them?
My Trading Challenge was designed to offer just that: a mentor-based approach where I can teach my students how to benefit from my good trading techniques and how to avoid the mistakes I made while I was learning.
It’s an immersive approach where you learn as you trade (or paper trade). Basically I want to teach you how to set up a strong foundation as a trader.
You’ll learn the art of creating a watchlist, how to identify patterns and some of the ones that I love that have consistently gained me profits, and how to find your own style as a trader.
While you’ll never be right all of the time, by taking part in my Challenge you’ll be able to set up best practices as a trader that will ensure that you’ll be following the right path.
Over time, attention to detail and technique is what will help you survive — and hopefully thrive — as a trader.
The Bottom Line
High-volatility penny stocks can provide opportunities to grow your account quickly and exponentially.
This can be extremely enticing for traders at any level, but it’s particularly appealing to traders with small accounts, as it lets them in on the action without a huge output of cash.
However, as the name implies, these stocks are indeed volatile. It’s very easy to make mistakes that can cost you capital if you don’t do your research.
Before you begin trading high-volatility penny stocks, it’s extremely important to take the time to do thorough fundamental and technical analysis to mitigate risk. This is what will make the difference between gambling and taking a calculated risk in your trades!
Have you traded high-volatility penny stocks? Are you a fan? Leave a comment below and tell me why or why not.