Round Numbers in Penny Stocks Trading
Round numbers play a critical role in trading when they are near the support or the resistance level. If you are new to trading not familiar with support and resistance, read Support & Resistance in Penny Stocks Trading.
As penny stock traders, we should pay special attention to round numbers when finding stocks to watch and executing our trades.
What Are Round Numbers?
Round numbers are whole numbers like 1, 2, 3, 4, 5. We also include numbers with 1 decimal as a round number so numbers like 1.1, 1.2, 1.3, 1.4, 1.5, 2.5, 3.5, 4.5, 5.5 are also considered round numbers.
Why Are Round Numbers Important in Trading?
When support is found at round numbers, it enhances the strength of the support. If a stock takes off from these levels, it triggers a very bullish signal.
For example, if a stock that usually trades below $1 runs up big time to $5 in a short time and then falls back to $1. The stock then consolidates around $1 and trades anywhere from $0.88 to $1.12. We would say there is support around $1 and it might be a good entry point.
Here are a few stocks that did well with the $1 support level. The support for IGC holds perfectly as the stock never dips below $1 after it pulls back from the August high.
Based on the pullback penny stock strategies, and combining the round number theory, I got on this trade just on time.
As you can see from the screenshot in my Fidelity account, I bought $1,575 worth of shares on 9/2 when IGC was very closed to $1 and sold it for $1,001.97 and $1,322.97 the next day (9/3). I had a gain of about 47.5% which is not bad for a 1-day hold.
I then rebought IGC on 9/30 when it got close to the $1 level again ($2,100), and bought some more on 10/6 ($1,526.00), and sold all my shares when IGC bounced again the next day for $4,335.92. This time I made 19.5%.
GRNQ is another stock that I traded when it consolidated around $1, but the chart doesn't look nearly as perfect as the IGC chart because the stock prices dipped below $1.
GRNQ had made a big move on 8/18 with an intraday high of $3.12. The stock then pulled back to around $1 in the next few weeks.
I first bought the stock on 8/27 ($1,508), bought some more on 9/3 ($753.46), and then added it again on 9/17 ($1,325.87).
I sold all my shares in 2 transactions on 9/29 when GRNQ ran up again for $2,767.53 and $3,119.93 for a total gain of 64%.
Looking back, I realized it was a mistake that I did not rebuy GRNQ on 10/2 when the stock pulled back again to the $1 level, and it made another rally the very next day.
EXPR is a stock that I bought on 1/26 and sold the next day. I bought the stock because it was breaking out and pulled back to the $3 round number as support.
I used a different strategy for this trade than the first 2 trades. Read the breakout penny stock trading strategy to learn more on how to trade breakout stocks.
I set a stop loss below $3 in case the trade doesn't work out. My entry price was $3.07, and a 12% stop loss at $2.70. Fortunately, the stock hit a low of $2.83 and didn't hit my stop loss.
EXPR gapped up over 150% the next day, and I took half of my profit.
The stock then went down to about 90% before it made a comeback to an intraday high of over 350% gain.
I sold another quarter of my position when the stock was up 180% and then sold the rest when EXPR was up around 210%.
Never Set Limit Order At Round Numbers
For convenience reasons, many people would set limit orders around round numbers whether they are buying a stock or selling one.
It is never a good idea to set your limit orders at these levels because there is often support or resistance at the round numbers and your order may never get executed. And that's not even the worse part. Let's take a look at an example.
Let's say you bought a stock around $4.5 and you want to take profit at $5. However, there is a resistance at $5. There will be 2 scenarios, your limit order gets hit or it doesn't.
Scenario 1 - Limit Order Not Getting Hit
If you place a sell limit order to sell the stock at $5, your order may never get hit.
The stock can go up to $4.94 and then falls back because there is a psychological resistance level at $5.
Many traders start selling or shorting at these levels. When there are more people selling than buying, it pushes the stock downward.
Scenario 2 - Limit Order Gets Hit
The worst part that could happen is when your order gets hit at $5 and the stock takes off from there.
When a stock goes above resistance, it could go much higher due to traders buying at these levels. Since you have already exited the trade, you end up missing out on all that profit.
By placing your limit orders at round numbers, you are actually getting the worst from the two scenarios.
You are basically risking money to bet the resistance level to be hit which is harder than if you were just to take profit below that price level.
And once the resistance level is hit, you sell and exit the trade when you should have been buying because the old resistance has now become the new support.
Combining round numbers with our other chart patterns increases the strength of the signal and the odds of a winning trade.
However, not all penny stocks that touch the $1 support are going to take off. Otherwise, all we have to do is to buy these $1 stocks and we are all set.
That's why we should never use the round number as a sole indicator. We should always combine it with other technical indicators and chart patterns to get the best results.
Remember, a pattern only gives us an edge in the market, there is no guarantee that it will work on this trade.
We should always have stop loss below the support level to protect us from disasters in case our pattern fails us. Trading without a stop loss is one of the top 10 trading mistakes a trader can ever make. Unfortunately, beginners make this mistake all the time.
Stocks Trading at Round Number
Follow is a list of stock gainers and losers that are trading around round numbers 1, 2, 3, 4, and 5 with minimum trading volume of 1 million shares. These are penny stocks that one can watch and trade with the Robinhood app.
published on July 01, 2022
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