If you are a new trader and you want to get involved with trading stocks under five dollars per share, you probably want in on the next "hot penny stock." Emotions start to creep in right away when someone thinks about the potential to get rich quickly by simply buying a few penny stocks with big potential. The trick is to try to keep your dreams of a new house and Porsche convertible under wraps so you can invest with a clear head.
Micro cap trading can turn out to be quite profitable for you if the stars align in your favor. However, there are some important things you need to understand before you throw your hard-earned money into any trade. I have a 3 pointers that you should consider before considering any penny stock to be hot enough for you to invest in it.
* Average daily volume. You want to make sure this amount equates to $20,000. Nothing worse than dropping two grand into a trade that you can't sell when the time comes. This ensures liquidity, an often overlooked factor in the world of trading microcaps. To compute this number, simply take the last 5 days of trading volume and times it by the current share price. Then divide that number by 5 and that gives you the average dollar amount of trading volume. Never trade more than five percent of the total average daily dollar volume. * Internet buzz. How popular is a particular stock on investorshub.com? If it is gaining popularity it is a good sign. * Past performance. Hot penny stocks go up for days/weeks at a time and then go back down. Several months later, they repeat this cycle. Equities without prior breakouts are riskier than ones with a history of big moves to the upside. A quick way to figure this out is to go to stockcharts.com and pull up a weekly chart of the stock you are considering. You will be able to tell if has had a significant move in the last twelve to eighteen months.
These three pointers will help you avoid some duds in your trading exploits. The trick is to not get caught up in the hysteria that surrounds penny stock trading. Stay disciplined and you will give yourself a fair shot at doing well as a trader. To see what hot penny stocks I am trading, you can check out my blog.
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