Momentum in Penny Stocks


As we come to the end of the week, my weekly report is that overall this was a fairly slow week. Last week, we had a lot of action and the week before was even better, but things have cooled off a little bit.

Week in Review

I started the week on Monday with just one trade.

Tuesday I took two trades.

Wednesday I took zero trades.

Thursday, I took 13 trades and on my first trade I was green and on my second trade, I went into the red. In my third trade, I went deeper into the red. I spent the morning recouping the loss to finish the day green, but I churned a lot of fees and commissions.

And today here on Friday, we had a gap scan where there really wasn’t anything that looked very good. The leading gapers were penny stocks. I wasn’t interested in them. One of the other stocks was very thickly traded, so I didn’t take much interest in that one either. And the result was that I probably shouldn’t have taken a single trade.

However, today I did take two trades and these were on stocks that hit the high of day momentum scanner. Sometimes when there’s nothing on the gap scan and the market opens, I just watch what hits the high of day momentum scanner. And I do sometimes find some good trades off of it, but today I’m finishing down a little over $500, which is a small red day.

Penny Stock Theme for Day Traders

The theme in the market this week was penny stocks. And this was also the theme last week. Last week we had a couple of penny stocks that made big moves. And I think that traders are… getting really excited about a 20, 30, 40 cents stock, having the potential to maybe go up to $2 or $3 a share. Most of them don’t go up that far, but we are seeing a lot of volume in these penny stocks.

Unfortunately for me, penny stocks are difficult to trade.

1. The commissions for me are going to be higher. I understand that a lot of traders use commission -free brokers, and I think that’s great, but I use a broker that’s still charged as commission. And that commission is also including a per share fee. So for every share I trade, I pay a fee to the exchanges. It’s called a pass -through ECN fee. And it’s a routing fee. These order routing fees can be substantial.

On 10,000 shares, it’s about $30. So if I trade 100,000 shares in one day, my commissions will be 300 bucks. And that would mean I bought 50,000 shares and sold 50,000 shares. That would be 100,000 shares traded. Now, it’s true that you can collect ECN rebates depending on how you sell your orders, but the rebates are smaller than the fees, and they don’t make a really big difference. So the fact is if I start trading lower-price stocks, I’m going to rack up commissions very quickly.

2. Stocks under $1 trade with a minimum spread of 1/100th of a penny. Which means for a stock to go from 90 cents to a dollar. It’s only 10 cents. Just 10 pennies. However, it’s actually 1,000 increments of a 100th of a penny. So the stock actually has to go up 1000 price increments to go from 90 cents to a dollar. 1000! But to go from $1 to $1.10, it only has to go up 10 price increments because over $1.00 stocks trade with a min spread of 1 cent.

I think that’s pretty incredible. So naturally, stocks move a lot faster when they’re over a dollar a share. So for that reason, I avoid the lower price stocks.

3. I find that in order to make money trading penny stocks, I have to trade with very big position sizes. However, it’s not as easy to move in and out with a really large position. This means I end up accumulating a position and then I don’t feel like I can jump out of it quickly if I see something on the level 2 or on the chart that I don’t like.

It’s kind of the difference between being in a rowboat or being in a big ferry. And in a rowboat, you’re nimble, you can move it in out quickly, you can get out of the way. But when you’re trading with larger size, it’s like being in a ferry in a small harbor and you can get wrecked pretty quickly.

In Summary

So the main issue this week that slowed me down was that… While we had some momentum, a lot of the momentum was on lower price stocks, which is not where I tend to make the most money and it’s not where I would prefer to trade. The market’s cyclical and we’ve been in a cycle where the attention has been on penny stocks. I’ll be happy when it shifts back towards stocks price between two and 20 and until then the best bet is going to be for me. To manage my risk and take it slow. I would say this week I had a couple of close calls and avoidable losses being a little too aggressive. So next week I need to try to bring that down a little bit and slow down until things heat up again.