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Trading Tips-Tim Sykes Penny Stock

Use Liquidity To Your Advantage

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Written by Timothy Sykes
Updated 6/15/2022 5 min read

Back in the day when I was a rising tennis star, my coaches taught me about the sweet spot on the racket.

Contrary to popular belief, the sweet spot on the racket isn’t where the ball rebounds with maximum velocity…

…and it isn’t the spot where vibration disappears after the ball is struck.

It’s actually the optimal spot that gives the best response for the effort given.

In trading, we call that more bang for your buck.

It’s sort of how stock liquidity works too.

There’s a sweet spot for most trades.

And I want to show you how to find yours.

Because once you discover it, you’ll be able to find higher probability setups and maximize your profit potential.

Liquidity 101

Financial pundits love to throw this term around a lot to make themselves sound smarter.

But it isn’t rocket science.

Liquidity refers to how easily a trader can enter or exit a position.

This comes down to several factors:

  • Total shares available to trade (IE Float)
  • Volume
  • Exchange

When a stock has fewer shares available to trade, it doesn’t take much volume to move the shares. That’s why these are more likely to create runners.

On the flip side, a stock with more shares available to trade tends to chop around more without a clear direction.

That said, if you get enough volume into a stock, even one with a lot of shares available to trade, price will definitely start to move.

So float and volume make sense, but what does the exchange have to do with anything?

On major exchanges like the Nasdaq, AMEX, etc. market makers facilitate trading. They add volume into stocks and make it easier for investors to buy and sell.

OTC markets don’t have market makers. They rely on trades between two parties.

That makes OTC markets inherently more illiquid than the regular exchanges.

Does that make OTC better than the NASDAQ? Not necessarily, and I explain why.

Finding The Sweet Spot

With the way that I trade, I look for stocks with lower floats yet decent liquidity.

That’s why I often trade small caps on the NASDAQ, AMEX, or OTC markets.

When a stock has too much liquidity, you start to get additional players like high-speed traders, scalpers, and others jockeying for position and reducing arbitrage potential.

This tends to create a very choppy stock chart that I often get stopped out of because I focus on cutting my losses quickly.

At the other end of the spectrum, I need enough liquidity to be able to take a big enough position, and trade in and out of the stock.

Think of it this way. I may want to trade a stock that costs $0.50 for a 5% gain to make $500.

That means I need to buy $10,000 worth of stock or 20,000 shares.

That’s fine if a stock trades a few million shares each day. But if it’s only trading 50,000 or even 500,000, it’s going to be incredibly difficult if not impossible to get in and out.

Generally speaking, I like stocks that trade a few million shares per day.

And if I can get one with a float at or below 10 million, all the better.

One way I check this is to use the screener on the StocksToTrade platform to look for stocks with heavy volume and price action in premarket that also have a low float.

This helps me locate the right stocks every day without having to sift through all the stocks gapping up or down every day.

One other thing to watch out for is the bid-ask spread.

The bid is the best price you can sell shares for while the ask is the best price you can buy them for.

I like to see these as close together as possible.

Otherwise, I can lose money even when I get a trade right.

For example, let’s say a stock’s current bid is $0.50 and the ask is $0.55.

That means I’d have to buy the stock at $0.55. Then, in order to make a profit, the stock would have to rise to $0.65 just so I could walk away with $0.05+.

A wide bid-ask spread is also a sign of low liquidity.

The Bottom Line

The amount of liquidity a trader needs is based entirely on the way they trade.

Because I’m conservative and take small losses quickly, I need enough liquidity to trade effectively but not so much that it prevents decent price runs.

Follow some of your favorite stocks for a week or two and see how they react when there are high and low liquidity periods.

You can also get more information on liquidity with my free YouTube video here.


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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”