Navigating the Challenges of Penny Stock Trading: Insights from a Day Trader


Right now, we are in a penny stock cycle. This is a cycle that I’m very familiar with because it tends to happen several times a year. And generally, my approach is just to wait it out. As a full-time day trader, I am often trading penny stocks in the sense that the SEC defines a penny stock as anything under $5 a share. In reality, I don’t like trading stocks under $1 a share. And there’s a good reason for that.

Penny Stocks Under $1.00 A Share

Stocks that trade under $1 a share are typically thickly traded because to make good money trading them you have to buy tens of thousands and even hundreds of thousands of shares. With this amount of volume, the stock becomes congested. And what makes it worse is that stocks below $1 a share are quoted all the way down to the 1/100th of a penny. That means the lowest-priced penny stock is 0.001. It’s called a trip zero stock. And that’s the bottom of the barrel.

Now most of the penny stocks that have been in play in the last two weeks have started between 20 and 50 cents a share and then topped out between $2 or $3 a share, but they have the same problem even when they get up to $1 a share they are very thickly traded.

When I started Day Trading Penny Stocks

When I started trading maybe years ago, I found myself gravitating towards scalp trading, which is a strategy of taking very quick entries and exits. Because I felt that the less time I had in the market, the less risk I was taking. Even though there might be times when I buy 10,000 shares of a $4 stock and have $40,000 on the line if I only held the position for five minutes I didn’t really feel like I was taking as much risk.

Maybe this is just a way that I justified using leverage. But to this day, I feel more comfortable with shorter hold times.

The Challenge With Scalp Trading Penny Stocks

When it comes to trading penny stocks these are very difficult to scalp trade because they don’t pop up 15 or 20 cents on a breakout. They might only go up 4 or 5 cents. So when you factor in slippage plus commissions scalp trading penny stocks is not very profitable. The people that seem to do the best are the people that buy it walk away for a while, come back, and sell it for $0.40 or $0.50 cents or a whole dollar a share of profit.

Unfortunately, that type of trading goes against everything that I’ve learned. At the same time, if penny stocks are the most obvious stock in the market and it’s what everyone is focusing on, I feel rather silly. To look the other way. I feel like I should try to trade them actively. Occasionally, I will. But even on the days when I break the ice and trade penny stocks, they never contribute in a meaningful way to my total profits.

Waiting out the Penny Stock Cycle

The best thing I can do is wait out this cycle until it’s over. A couple of weeks ago, we had a penny stock that went from about 30 cents a share all the way up to $11. I think that might have set a record this year for the largest percentage gain in one day.

But rather than create momentum on stocks between $5 and $10, it created momentum on what traders thought might be the next 20 or 30 cents stock that would do the same.

The Stock Market is Cyclical

Something that I’ve always said is that the market is cyclical. We have hot cycles, we have cold cycles, and right now, we’re on a penny stock cycle, which is better than nothing. But sadly for me, it doesn’t fit within the strategy where I really make a significant amount of money.

Last week was a very slow week for me in trading. I had one no-trade day, and I had two days that could have just easily been a no-trade day because there was really nothing moving that fit within my strategy. I ended up trading subpar setups, making a little money on one day and then losing it the next day. Ultimately, it is a discipline that will get me through these cycles when the stocks that are in play don’t fit within my strategy. Thanks for watching.