For those interested in learning strategies for trading penny stocks, one method that many day traders and swing traders use for penny stocks is to determine the most volatile penny stocks and make their trades based on their findings and their own unique trading strategy.
While choosing volatile penny stocks certainly isn’t a fool-proof system and comes with every risk you can imagine – it can be a good indicator and opportunity to experience gains on a penny stock.
To understand how to find the best penny stock picks using this method, it helps to first understand the meaning of volatility and why this can be beneficial for traders depending on their strategy.
What are Volatile Penny Stocks?
Volatile penny stocks generally are stocks which have large differences between high and low prices and sell for less than $10 a share.
Before we get any further: As we’ve mentioned in our article about penny stock scams, it is important that if you are new to penny stock trading that you understand that anything not traded on a reputable stock exchange such as NASDAQ, NYSE, or AMEX – there is a HUGE risk of losing everything, since pink sheet stocks generally are not regulated and may not even be real.
Penny stocks on these stock markets are not truly stocks which sell for a penny – in most cases they are available for a few dollars per share all the way up to $10 a share. (how one defines a true “penny stock” can be left up to interpretation).
The advantage to penny stocks is they can be purchased in large volumes without needing to invest a large sum of money. For this reason, many traders who are new to trading with little money for investing often turn to these as a way to get their start in the stock market.
High Volatility means the stock moves up and down in value quickly and by large amounts. Low volatility would suggest there is very little movement in price.
Why Are High Volatile Penny Stocks Desirable?
While not everyone should trade using this method, one of the reasons high volatility is desirable is because you have the possibility to see a profit in a relatively shorter amount of time. It may only take a day or maybe a week to see a profit, though keep in mind that is not always the case. This also tends to suggest it is a high volume stock, which can be advantageous for some traders.
How to Find the Most Volatile Penny Stocks
It is not too difficult to find the most volatile penny stocks.
The first thing to do is understand which technical indicators and what data can be used to determine a stock has high volatility. Here are a few popular indicators that can help you pick penny stocks using this strategy:
Bollinger Bands: These bands are two bands plotted two standard deviations away from a simple moving average. In a volatile market, these bands are spread wide apart – in a less volatile market, the bands are closer to the average. When the prices moves closer to the upper band, this can signify the stock is being overbought and when the price moves closer to the bottom band it can signify the stock is being oversold.
Rate of Change (ROC): Rate of Change measures the percentage change between current price and the price from a certain time period ago (in most instances this is 10 days). If the ROC is positive, the buying pressure is increasing and the price may continue to rise. When the ROC is decreasing, it means so is buying pressure and the price will likely slow down as well. Negative ROC indicates that selling pressure is increasing and that the price is likely going to go down rather quickly.
Parabolic Stop and Reverse (SAR): This indicator can be observed when points plotted on the price chart take the shape of a parabola which can be above or below the current price. This can be a sign of the end of a current trend or a reversal.
Finding Volatile Penny Stocks Using a Stock Screener
A stock screener is a great way to identify which penny stocks meet your criteria.
We recommend and use Finviz.com stock screener, which is free to get started with.
To use it, click on Screener, and then choose “technical” for the analysis.
Here is a screenshot of what it will look like:
Next, you will click on the technical tab and choose a beta level that is high – usually anything above 2 will reflect a decent amount of volatility.
In this example, I choose the number 4. This returned a few results, which we now research further to determine whether any of these may be viable penny stock trade investments.
Note: If you have the Elite FinViz membership, you will be able to put in more variables or even a custom range.
Once you learn how to do this with a penny stock screener, it is relatively easy to the find the most volatile penny stocks – though of course analyzing stock charts should also be done and you must remember all penny stocks can be extremely risky!
Have any penny stock picking strategy tips? Have you used this method? Share your thoughts in the comments section below!