How to Make Real Money Trading Penny Stocks?
Nowadays, it appears that everyone and their best friend is trading stocks online. This newfound vocation is attracting retail traders across the United Kingdom. For one thing, online trading is easily accessible on PC, Mac, and mobile. The stock market has shown tremendous resilience in the face of overwhelming adversity. Few experts would have predicted a robust rebound given what the world is currently undergoing. It is against this backdrop of lofty expectations, and faith in big business that we tackle the topic of trading penny stocks!
What Are Penny Stocks and How Can You Make Money Trading Them?
In the UK, penny stocks trade at under £1. This differs from the definition of penny stocks in the USA, where a value of $5 or less is applicable. Regardless, penny stocks everywhere are extremely volatile. Thanks to their low price, they have the potential to provide outsized returns to traders. Of course, you need to pick the right penny stocks to make that happen. Here in Blighty, penny stocks are traded on small cap indexes, such as the AIM All-Share Index, or the FTSE Small Cap. Before you get too excited, it is important to stress that penny stocks are high-risk financial instruments.
Now that 2021 is well underway, it’s a good time to assess the current selection of top penny stocks to trade. Given what the world is currently going through, we know where the depressed industries are, and where the potential lies. The first order of business is an in-depth evaluation of the top penny stocks to trade. The most important elements to consider with penny stocks are volatility and liquidity. Without those two elements, it’s impossible to profit from day trading penny stocks (buying and selling within the same trading day). As you learn to trade penny stocks, you will become acutely aware of how much there is to learn about the financial markets.
Let’s kick things off with several examples of top performing penny stocks:
(NYSEAMERICAN: PLM) – Polymet Mining Corporation AMEX
Polymet Mining Corporation (AMEX) is an interesting stock to trade. PLM qualifies as a penny stock by US standards, although it is priced significantly higher than the UK threshold of £1. Note the volatility of the stock through September, October, November, and December 2020. The upper green line is the top Bollinger Band, the dotted green line is the median Bollinger Band, and the lower green line is the base Bollinger Band. The 50-day moving average price of the stock is $3.56, but the spot price is lower than that, indicating bearish momentum.
The stock’s current price of $3.51 is firmly between the upper and lower BBs, indicating there is significantly less volatility in January 2021. Prices have stabilised, as can be seen by a tightening of the Bollinger Bands. If the price moves above the upper band, or below the lower band, these are called retracements (overbought territory and oversold territory respectively). In order to assess the viability of a penny stock, technical indicators such as Bollinger Bands, Ichimoku Cloud, Relative Strength Index, and others should be consulted.
Be advised that day trading activity does not require financial instruments to appreciate for profits to be generated. You can short sell a stock like PLM if there are clear trends indicating bearish momentum.
(OTCPK: ALYI) – Alternet Systems Inc (OTC Market)
ALYI is a true penny stock in every sense of the word. It is priced right at $0.027 per share, and it enjoyed near-explosive growth, followed by spectacular declines over the past couple of months. While the nominal price movements are minimal, the percentage appreciation and depreciation are substantial. For example, from a price of $0.010 in November, to a price of $0.035 in January, traders effectively enjoyed a 300% + ROI. That’s why penny stocks present with so much potential.
For a stock like Apple Inc (NASDAQ: AAPL) to generate a 300% return within three months, it would have to go from $130 per share to $390 per share. While it’s certainly possible, it is extremely unlikely. This is perhaps the most important reason why traders prefer penny stocks. It is possible to buy hundreds, perhaps even thousands of extremely low-cost penny stocks and watch all of them rise astronomically. That same trading budget would not go very far with blue-chip stocks, and the appreciation will likely be tempered to a degree.
Take Emotion Out of the Trade and Focus on Short-Term Goals
Many casual traders just getting started often overcommit themselves emotionally and financially to individual stocks. If investing is akin to a marriage, trading is more like a one-night stand. The objective is not to form a long-term union with the stock you’re interested in trading. The goal is simply to achieve a pre-stated objective, and then exit the trade. To do so, you must divorce your emotions from your logic. It is an inanimate object after all.
With penny stocks trading, your goals should be pre-set. Profit targets and price points are a good place to start. If your research and understanding of the stock suggests that its price will move one way or the other, you can accommodate for this with price targets. Stop loss, and take profit orders, trailing stop loss percentages, trailing stop loss dollar figures (or GBP equivalent) are certainly the best way to mitigate against volatility with these high-risk stocks. Sure, you will come across many stocks that rallied well beyond the point where you exited the trade. In much the same way, your pre-set actions will save you from certain ruin when the market turns against you. It’s all about playing it smart, that’s the way to go.
One of the hardest concepts for new traders to wrap their heads around is that of short selling. We’ve been programmed to believe that the only way to make money trading stocks is buying low and selling high. However, it is possible to bet against a stock a.k.a. short sell that stock by borrowing the shares from the broker at the current price and buying them back from the broker when the price drops. The difference between the high price initially and the low price at the time of trade execution is your profit.
There are many nuances in penny stocks trading that are less pronounced in traditional stocks trading. For example, volatility and liquidity levels are different. Many penny stocks companies will fail. A lot of them are unregulated, and not listed on any of the exchanges. They trade OTC, or as pink sheets. Therefore, many penny stocks are not subject to the same stringent reporting requirements as listed stocks. Buyer beware. Provided you’ve conducted due diligence, you can learn to pick top performing penny stocks and profit off them. Would you believe that Amazon and Facebook started off as penny stocks too?
Let’s Sum Up With A Few Important Tips for Trading Penny Stocks in the UK
- Not everyone should trade penny stocks – you may not be able to stomach the volatility, and the losses.
- If you’re not going to do the homework, it’s not worth trading penny stocks.
- Following the advice of other traders, experts, and gurus is not necessarily a recipe for success. You need to verify the facts for yourself at the time of the trade.
- While everyone focuses on profit as the objective of penny stocks trading, your true goal should be the acquisition of knowledge to become a better trader. Once you understand market mechanics, profits will invariably follow.