How to Day Trade Penny Stocks
Day trading penny stocks is one of the most lucrative ways to make money from the stock market, but it also requires a lot of skills. In this step by step day trading guide to penny stocks, I will show you how to get started in day trading.
Day Trading Risks
Everyone is trying to make money trading the stock market nowadays, yet most didn't realize how risky it is.
People just jump into the stock market without any plan or knowledge of how the stock market really works. They simply wanted to make extra money quick or become a full-time trader so that they can work in their pajamas.
How to Get Started in Day Trading?
Just like swing trading penny stocks, the first step in day trading penny stocks is to find a winning chart pattern. A profitable penny stock pattern is your edge in the stock market. Without that edge, you are just like everybody else who treated the stock market like a casino.
In swing trading, the main chart that you need to focus on is the daily chart. With day trading, you need to learn how to read the daily and intraday stock charts. By using multiple time frames on stock charts, you increase the odds of a winning trade. Read the articles below to learn how to read stock charts and find a winning penny stock chart pattern.
How to Read a Penny Stock Chart
Top Penny Stock Chart Patterns
How to Find a Profitable Chart Pattern
Many people think day trading is that you have to watch the screen all the time, that's certainly one way to day trade. However, there are other day trading strategies that allow you to trade only a couple of times a day and still make a profit.
Some day traders only trade in the morning hours from 9:30 am to 11:00 am while others trade in the afternoon before the market closes. No matter what day trading strategy they use, as long as they are making money, that's all it matters. Keep in mind, day trading in the morning is different than in the afternoon, so you may have to adjust your strategy if you are planning to trade all day long.
Day Trading Requirements
Traders who are planning to get in and out of stocks multiple times a day using a margin account may be flag as a pattern day traders (PDT). Pattern day traders are those who execute four or more trades in the course of 5 business days in a margin account. These traders will need to have a margin account which requires a minimum of $25,000 in their account.
If you have a small account and can't put up $25,000 in your account, that is fine. You can still day trade in your cash account with settled funds only.
In a cash account, It takes 2 business days for a trade to settle. That means if you buy and sell a stock, it takes 2 days for the money to be settled. There are cash rules that traders and investors need to follow in order to stay compliant with your broker. You can check with your broker to learn more about cash account rules.
In short, you can buy stocks with unsettled funds in your cash account, but you cannot sell them before the funds are settled. Margin accounts don't have this restriction.
The cash account rule is not necessarily a bad thing. Many beginners tend to overtrade the stock market and end up losing a lot of money. Having this rule forces a trader to make fewer trades a week and so that a trader only trades with his most profitable pattern rather than making random trades.
Day Trading Strategies
I will share two day trading strategies that I use with decent results, the pullback and breakout strategy.
Pullback Strategy - Day Trading Strategy 1
The first day trading strategy is a modified version of the pullback strategy I used for swing trading that I share in my swing trading guide.
- Find stocks that are trading in the range of $0.5 - $10
- These stocks have a big jump in prices in the last few days.
- The stock must be up over 40% on the last trading day.
- The stock pulls back to the previous day's open price or low price today.
- If the stock is still trading at that level near the market close (3:45 PM - 3:59 PM), buy the stock.
- Must sell the stock the next day no matter what happens.
Let's take a look at a few examples.
The stock EXPR qualifies our trading condition on 1/26/21.
- EXPR is trading at $3 which is in our trading range of $0.5 - 10.
- EXPR is up from around $1 to $4 in the last few days.
- EXPR more than doubled on the last trading day (1/25/21).
- EXPR pulls back to the previous day's open price or low price today (1/26/21).
- EXPR is still trading at that level near market close on (1/26/21), so it qualifies as a buy. The fact that EXPR is trading at the round number $3 makes it an even stronger signal. You can learn more about round numbers here.
- After we bought the stock on 1/26/21, we must sell the stock the next day or 1/27/21.
This is exactly what I did. I bought the EXPR stock on 1/26/21 and sold it the next day. Since EXPR gapped up over 150% the very next day, I sold some of the shares at open and then sold the rest of my shares in 2 more transactions during the day.
How to Enter a Trade?
For my day trading positions, I would only buy a stock near the market close. That means I would only buy around 3:45 PM - 3:59 PM.
Penny stocks are volatile in general and their prices move up and down during intraday. A good-looking penny stock chart in the morning doesn't mean it would still look good in the afternoon.
How to Exit a Trade?
There are a few ways that I exit a day trading position on penny stocks.
- Time Limit - I have a time limit that requires me to sell the stock the very next day. It doesn't matter how much profit I make or how good the chart looks like, I would sell it before the market closes the next day. The time limit allows me to minimize my risks and lock in profits.
- Profit Taking - I usually set a profit target of 20%. If the stock gaps up or moves in my direction and my profit target is hit, I would sell partially or the whole position depending on how much I have invested and how high the stock goes.
- Stop Loss - I set a stop loss on all of my trades. If my stop loss of 10% is hit the next day, I would sell it and close out the losing position.
Breakout Strategy - Day Trading Strategy 2
The second day trading strategy I use is a breakout strategy with the following conditions.
- Stocks in the range of $0.5 - $10. (same as strategy 1)
- Stocks have a big jump in prices in the last few days. (same as strategy 1)
- The stock breaks above recent resistance and is trading at or near the high of the day before the market closes (3:45 PM - 3:59 PM), preferably near a round number, buy the stock.
- Must sell the stock the next day no matter what happens. (same as strategy 1)
I use the same entry and exit strategy as the day trading strategy 1 that I share above, which is to only buy the stock around 3:45 PM - 3:59 PM and exit the position the very next day.
A buy signal was triggered for CCNC on 2/8 and 2/11. CCNC met all our conditions for a buy near the market close on both days.
- CCNC is trading around $4 which is in the range of $0.5 - $10.
- CCNC went from $2 to $4 prior to 2/8 which is a big jump.
- CCNC is trading at resistance 2/, and the stock closed around the high of the day at a round number of $4. This is a perfect setup for a buy near the market close.
- Sell the stock the next day or on 2/9.
CCNC had a similar setup on 2/11 where it was trading near the high of the day around market close. The round number $5 makes it an even better set up to buy the stock before the market closes that day (3:45 PM - 3:59 PM). CCNC did well the very next day on 2/12.
A buy signal was triggered for ANTE on 2/16. ANTE met all of our conditions for day trading as a penny stock.
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- ANTE is trading around $5 which is within our trading range.
- ANTE had a recent run from below $2.5 to $5.
- ANTE closed near the high of the day on 2/16 at the round number $5. A buy signal is established for the stock near the market closes on that day.
- ANTE did well the very next day and that's the time to exit the trade.
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The following 3 stocks had similar setups as CCNC and ANTE, so I won't get into the details of how to buy and sell them.
Day Trading Mistake to Avoid
Please keep in mind not all stocks work out well like the examples I've shown you. Sometimes, the stocks don't go anywhere, so I would just sell them break even. Other times, I had to take losses when the stock went down or gapped down in the worst situations. I would just cut my loss and move on to the next one.
The worst mistake a trader can ever make is to get stuck with their losses and trying to make their money back by holding the stock longer. By hanging on to a losing trade, you will crush your confidence and account if the stock keeps going down.
On top of that, you are breaking the stop-loss rules which will eventually come back to bite you.
Always remember, there is really no difference between making your money back on this losing stock or any other stock. The best approach to a losing trade is to cut your losses and move on to the next trade. As a day trader, you will probably be making over 10,000 trades in the coming years, don't let a few losing trades ruin your portfolio.
Read Top 10 Trading Mistakes to learn the other common trading mistakes that day traders often make and learn to avoid these mistakes.
How to Find Penny Stocks For Day Trading?
You can use our site to find hot penny stocks for day trading or swing trading. Use the daily gainers and losers to search and find the hottest penny stocks for the day by price or by volume.
You can also use a technical stock screener to get penny stock ideas. See the article below for a comprehensive guide on how to find penny stocks.
How to Find Penny Stocks to Watch
Day Trading Watchlist
Once you've found a list of stocks to watch, you can add them to the watchlist of any brokerage software that you use to trade, such as Fidelity, TDAmeritrade, or Robinhood.
I use the Fidelity desktop software that allows me to watch my stocks in real time. I sort the watchlist by percentage gain so that I can see which stocks are making moves for the day.
Day trading requires patience. Just like swing trading, it takes time and effort to learn how day trading works. You may have to study the charts of hundreds, if not thousands of penny stocks before you find a proven pattern that works for you.
You must also learn to adapt to market conditions and changes. Patterns may change when market conditions change. A pattern that used to work may not work that well anymore, that is why stop loss should be in place to bail you out when patterns fail. There will be times that you take consecutive losses and you need to learn how to deal with losses.
No matter what you do, treat trading like a business and not as a habit. Be obsessed with the market, and study constantly to improve your trading skills and gain more knowledge about the market. Track your trades, follow your rules, and learn from your mistakes.
Think of day trading as a long-term career instead of a short-term way to get rich. Learning is the only way to gain an edge in the market and increase your odds of success in penny stocks trading.
List of Penny Stocks to Watch For Day Trading
Following is a list of penny stocks to watch for day trading. These penny stocks are trading at or near round numbers and are useful to watch. Please note this list is not a penny stock to buy list, traders should do their own research and make their own decisions on which penny stocks to buy.
published on May 26, 2023
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