An active penny stock is one that moves up, down or sideways on a daily basis with decent volume. Its tough to tell you exactly how much volume because at 2 dollar penny stock will often trade with less volume than a .0001 penny stock. Obviously with the .0001 stock you can buy a lot more shares with the same amount of money than you can with a 2.00 stock. The amount of volume should be enough to get you in the stock without the price jumping away from you and when you sell you don’t want the bid to drop on you due to the amount of shares you are selling.
Since selling pressure causes a stocks price to drop, with a stock that is not traded fluidly as soon as you try to sell the bid price may drop on you. You must remember someone is buying what your selling, if you try to sell a lot of shares on the bid and there is not someone willing to buy them there, then the price will continue to fall.
Personally, I trade the less active penny stocks as well. I will try and buy at the bid or just above it with a standing order (GTC) Good Til cancelled. Sometimes I wait days/months and sometimes my orders never get filled. I will not chase the price as that is a sure way to cut into your profit or lose money.
When trading an active penny stock you may be buying the run up, anticipating news or trading the cycle. Trading the cycle refers to buying at support and selling at resistance. There are more articles about support and resistance throughout this blog. A trader looks at the charts history and notices a stock trades between .12 and .20, the trader will put in a buy for the .12 range and once he purchases he’ll wait for the stock to move up and sell in the .20 range. The other popular way to trade active penny stocks is to look for good news in the pre-market or some strong news that hit after hours the day before. The trader will buy the penny stock on the movement from the news and swing trade the momentum. This could be an intraday trade or the stock may run for a few days.
Beginner traders should stick with active stocks. If they buy the wrong stock or the right stock at the wrong price, they can still exit the trade quickly and hopefully without to much damage to the trading account.
