Day Trading Penny Stocks vs Big Board StocksIs day trading penny stocks the best way to make money day trading online? Relationship between company share prices and the risks of day trading. Pros and cons of penny stock day trading. I'm not going to address the question of whether or not it is possible to make money trading stocks. I think I have established that it is in the many make money trading stock articles I have published on this website. Neither am I going to talk about whether you can make money day trading online. I think we've all heard about the kind of money successful online day traders earn each year. The question before me today is this: Which is more profitable to day trade, penny stocks or the higher priced big board shares?
Day Trading Risks & Company Share PricesThe relationship between company share prices and the risks of day trading is an indirect one. Usually the lower the share price, the smaller or newer the company. New or small companies tend to be less financially stable than larger businesses that have been around a while.Penny stock companies often--but not always--teeter on the edge of bankruptcy. What this means to you as an online day trader, is that you would have to do more stock market research on a penny stock company than you might have to on a well established concern before adding it to your watch list. Insolvency risk is not as great a concern when you are day trading as it would be if you were planning to hold the shares overnight so this alone might not deter you from day trading penny stock.
Stock Price VolatilityPenny stocks are high volatility investments. This is what makes them so attractive to stock market traders who crave quick gains. The price of a penny stock can move 20% or more in one trading session!This is great if you are on the right side of the trade. But not so great if the trade goes against you. Day trading is the most active form of stock market trading. You will be making several trades per day. Because of this, day traders take losses more frequently than less active traders. Stock price volatility is the single biggest contributing factor in how often you will get stopped out of a trade. As a day trader, you want to pick stocks that are volatile enough to give you consistent, predictable gains when you win but not volatile enough to trigger your stops when you lose. Because you are taking gains so frequently, they don't have to be huge. A 1-2% gain does not sound impressive until you remember that we are talking about making it every day! If you can keep your losses small, you could make quite a comfortable living off these little gains. This is much easier to do with big board stocks than with penny stocks because of their lower volatility. A hot penny stock will sometimes gain more than 10% in a single session. The problem is the downside volatility of a stock like this. Moves to the downside will be big. The chances of you getting stopped out when trading these high volatility stocks is much greater than when trading low volatility stocks off the major exchanges. At best, your stop will trigger on high trading volume and you'll get out at the stop price. At worst, trading volume will be low and the share price will fall right through your stop causing you to lose more than you had planned to.
Stock Trading FeesBecause a day trader makes so many trades, stock trading commissions must be considered.Many
penny stock brokers
charge higher trading fees for shares under $1. Even if you shop around for the lowest trading commissions, you may still end up paying more to
trade penny stocks
than you would to trade higher priced shares.
Penny Stock Trading VolumeStock liquidity determines how long it will take you to buy and sell your shares. To make money day trading you need to be able to enter and exit trades in mere moments.Most penny stocks trade on low volumes.I would not entertain the thought of day trading penny stocks that did not trade at least a million shares per day. Check the stock's daily trading volume going back over several weeks. Some penny stocks experience large, sudden drops in stock trading volume. Avoid these. So what is the final verdict? Does day trading penny stocks make sense? Only under special circumstances. If trading volumes are very high and a breaking news report leads you to believe that a big gain is nearly a sure thing, then it makes sense to day trade a penny stock. As a daily practice, I don't think day trading penny stocks is wise. I think you would do better to invest your day trading money in
NASDAQ,
NYSE
or
American Stock Exchange
traded companies.
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Go from Day Trading Penny Stocks to Relative Volatility Index
It differs from the RSI (relative strength index) in just one respect: it substitutes the standard deviation over the past 10 days for the daily price change.
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