If you have just gotten acquainted with the world of investment, the chances are that you have heard of swinging from peaks to peaks. While this might be a great strategy to earn money as an active trader, your options might be limited in the world of penny stocks.
Penny stocks are good for swing trading as long as they are listed on NASDAQ and NYSE. Choice stocks that experience minor rallies regularly can be a source of substantial profit for the right investor. However, you must avoid the temptation to invest too much in a single penny stock.
In this article, you will learn about penny stocks and the two broad varieties of these stocks. You will also discover what swing trading is and how it differs from day trading. And since most penny stocks are not the right for swing trading, you will learn about other assets you can use the strategy with.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Penny Stocks Explained
Generally speaking, a stock that costs less than a dollar is called a penny stock. However, because of inflation and the general average rise in valuations, the term has broadened where it now stands for stocks that cost up to five dollars per share.
However, the term ‘penny stocks’ is problematic precisely because it covers a broad range of stocks that aren’t all qualitatively the same in anything except the price-point metric. While each stock is different, there are two main types of penny stocks:
- Micro-cap companies – Businesses with extremely low valuation where standard share division comes to $5 or less per share.
- Over-diluted companies – These are businesses where such a large number of shares have been floated that despite a decent overall valuation, the per-share price remains minute.
While micro-cap companies rely on aggressive brokers to sell their stock, companies with at least four million dollars in assets can get listed on NASDAQ. When companies with less than five million dollars in valuation go to a large enough stock exchange and meet their share floating requirements, they have to break down their shares to the point where the price comes down to $3 or $4. These penny stocks can be swing-traded for small profits.
What Is Swing Trading?
If you’ve seen the Tarzan cartoon, you know that the protagonist swings from a tree to another. In a stock price, you can picture the peak (high price point) to be a tree-branch and the valley (low price point) to be the ground. Every active trader wants to always sell at a high (tree), and to do this consistently; one must attempt to swing from tree to tree (peak to peak).
Technically, every active trader is a swing trader. The term, though, is applied more specifically to traders who are much more intentional about their swing trajectory. Unlike regular investors, swing traders expect dips and make them a part of their buying strategy.
How Is Swing Trading Different From Day Trading?
Day trading and swing trading are not mutually exclusive. A day trader can use a swing strategy. But most day traders buy stocks at a low price and sell high so they can immediately move to another stock that is undervalued at the given time. Because day traders swing between different stocks, their investment strategy and analysis are different from those who sell at perpetual peaks of the same stock.
What Types of Stocks Are Good for Swing Trading?
Swing trading involves finding a stock that has a reliable pattern of highs and lows. Since very few such penny stocks exist, you may want to scale your returns while diversifying your portfolio by engaging with different assets that are also optimal for swing trading.
Tech Stocks
Tech stocks have experienced a massive boom that persists over time. But when you inspect the price charts, you notice that the stocks do have drops in value. But since the price always goes up, you can reliably invest some of your money in Facebook, Google, or Apple anytime the price goes down because of the next PR crisis, data leak, or news story.
Companies in the News
Speaking of news stories, many companies have their stock value impacted by the media. Whenever a company that has consistently increased in value runs into a series of bad press incidents, you have the opportunity to swing trade.
A great example of this would be Tesla. Since Tesla keeps up on a bull trend despite the drops from Elon Musk’s tweets and negative media coverage, the company’s stock provides an excellent opportunity for swing traders.
Brands Associated With Public Figures
Elon Musk mentioned earlier is a public figure. With celebrities and public-personality CEOs, the general trader can come as close to insider trading as is possible while keeping things legal. Public figures like Kanye West, Elon Musk, and Drake are predictable.
Because of this, you can reliably pattern their behavior and predict a stock drop or increase and use that to your advantage to model your swing trades. Unfortunately, the frequency of such transactions isn’t likely to be sufficient because there aren’t enough crises happening regularly at a single company.
Swing Trading Penny Stocks – How It Can Be Done?
While the concept of swinging from height to height might be thrilling for a newcomer to active trading, to do this with penny stocks, you need a certain amount of skill and even a hint of luck. Follow the steps below to increase your odds of striking gold with swing trading penny stocks.
Go for value, not the price-point. The first step in figuring out the penny stocks you should get involved with is to do some fundamental analysis on the businesses behind these stocks. While swing trading is mostly a technical play, you hedge your bets by considering underlying real value so that when a swing trading strategy doesn’t work, you’re not left with worthless stock.
Do Not Ignore History
As the saying goes, “those who don’t learn from history, don’t make money when history repeats itself”. Swing trading relies on stocks’ price, having a cyclical nature. If every time you sell high and buy the dip, you make a consistent profit. But to do so, you have to find stocks that have performed in this manner for at least two years.
The reason behind going that wide on your analysis is that some stocks can be pumped and dumped a few times only to get swing traders excited before the stock’s backers abandon their stake forever. To make sure you’re not falling for such a scheme, you must look back and notice whether the price pattern has changed.
While a large enough hedge fund can manipulate stock’s price for a decade, it doesn’t seem feasible for financially-motivated entities to do this with a penny stock for such a long period.
Rely on an Expert
Whenever the term ‘expert’ is used alongside ‘stock trading.’ people get suspicious. That is good. Especially when it comes to penny stocks, the last thing you want to do is put your trust in someone without checking their credentials.
However, to swing trade penny stocks, you must align yourself with someone who has been doing it for a while. As long as you make sure the person you’re trusting for advice has skin in the game, you’re relatively safe.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Swing trading is perfect for stocks that experience massive fluctuation. One can swing trade anything from currencies to property. But with penny stocks, there is an opportunity to practice your hand at a small enough scale with little to no barrier to entry. Once you have mastered swing trading, it is advisable to move towards stocks that get more coverage and remain liquid enough to be sold at any given point.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
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