Penny stocks do not actually cost a penny. Not when you are talking about penny stocks that a day trader would want. Day traders are looking at penny stocks that cost anywhere from $2 to $10 per share. When day traders talk about penny stocks, they are talking about cheap stocks that are traded on the NYSE or the NASDAQ. Those exchanges require your share price to be above $1 per share.
Many traders believe that they can jump into penny stocks and make money right away. But in practice, it is much harder than it looks to make real money from penny stocks. You need to be able to identify the most likely stocks that will make big moves every day and be able to profit from them using momentum day trading strategies.
There are ways to make money from penny stocks. But you need to be sure that you can handle the ups and downs that penny stocks represent. The companies that trade at that level are subject to a lot of craziness and breaking news. That means that penny stocks could be the most volatile sector of the stock market out there. Which makes it great for day traders.
Day traders are always on the lookout for volatility. That is where the profits come from. You can search out opportunities for profits by finding stocks that make moves of 20% or 30% or 40% in a day and ride those jumps when they happen. The key is to be about as buttoned up as possible when it comes to risk.
Risk management is essential for day traders, especially when they first enter the market. The lack of experience with penny stocks can be deadly for those that do not have the screen time necessary to make quick decisions. As commonly known in military strategies, every battle that is won is planned before it is fought. Planning, strategy and preparation are vital to being a successful day trader.
Good traders know what they want to pay for a stock or what price they want to sell at. They estimate those prices before they make the trade and then apply stop-loss or take-profit to those price points. When they determine how likely it is that the stock will hit that price, they make the trade. That is a fundamental part of risk management when trading penny stocks.
Thinking through expected return is very important to day trading as well. You need to have a clear idea of what the trade is going to make for you, so you can really think through your potential trades. You need to understand historical breakouts and other technical indicators but the work needs to be thorough. When you can rationalize making one trade versus other potential trades, that is an important step in being a day trader. The main point is that you always need to know when you are going to exit a trade. Having a solid plan before your execution is key to becoming profitable.