Trading penny stocks is both difficult and highly risky. Most penny stocks fail so holding onto them long term is often a losing proposition. Day trading penny stocks is also difficult because they frequently move up and down in unpredictable patterns. However, if you are a trader whose only interest is in penny stocks than you may want to consider swing trading penny stocks rather than day trading them or holding them long term because there are several advantages to swing trading penny stocks.
What are the advantages of swing trading penny stocks?
The first advantage is that time is on your side when swing trading. In order to illustrate this I will show an example of a random penny stock that I am familiar with. The stock is called GEVO. If you know this one just wait and see the following chart before you pass any judgement. Here is today’s chart:
If you bought this stock at the day’s open you would have been in trouble. You would have been lucky to break even. If you had decided to short it mid day you would have also had trouble. The timing either way would have been both difficult and unpredictable. Now lets see how things would have gone if you had bought this stock and held it for the last 2 years. Here is the chart:
As you can see holding this stock long term would have been a terrible decision if you were long on it. Of course you could have tried to short it long term but there have been enough spikes with this stock to cause trouble if you shorted it at the wrong time. Now let’s look at GEVO over the last year and see if there were any swing trading opportunities with this penny stock. Here is the 1 year chart:
As you can see from the chart there have been roughly 6 different times you could have done quite well swing trading this one. Even though this stock has been steadily dropping over time, there are times when “good news” comes out and the price spikes. Let’s take a closer look at one of the spikes:
On May 7th of 2015 the stock opened at $3.56 and closed at $5.46! The following headline fueled this.
“Alaska Airlines, Gevo to demonstrate renewable Alcohol-to-Jet fuel in upcoming flight” – May 7, 2015 – Jim Lane
Needless to say it would have been difficult to predict such a jump in price. However, if you had purchased it in February or April or even early May and sold it after any of the spikes you could have done well. The point is with swing trading you could have profited from a stock that has been slowly dropping for years if you timed it right. I only chose this stock to illustrate that even with hopeless looking penny stocks you can swing trade them if you time them right.
The other advantage to swing trading penny stocks is that they are quite volatile.
Let’s look at another one to see how this could be advantageous to a swing trader. Here is the chart for SIRI Sirius XM Holdings Inc.
This is a perfect example of one you would not have wanted to hold long term as of today. Look at how far it has dropped! However, if you would have decided to swing trade this one you could have bought it in February or March, April, May, June etc. all the way up until October and sold it anytime in November and you would have done well. The point is that the volatility of penny stocks can be great if you buy them and wait for a modest gain and then get out before they drop back down again.
Here is an important tip: Do Not get Greedy!
Suppose you had bought 2000 shares of SIRI in October of 2015 at $3.70. You would have invested roughly $7,400. If you would have sold it in November of 2015 when it was at $4.19 you would have made roughly $950 profit in about a month’s time. That’s not bad right? Now imagine $950 was not enough. Imagine you wanted more so you decided to hold it. Well it would be worth about $7,200 right now and you would be down about $200! The point is…don’t get greedy. Take your gains and get out when you can.
The last advantage of swing trading penny stocks is that you can keep your money fluid.
What I mean is you can always get out and buy something else that interests you. Let’s say you bought one of the above stocks and suffered a quick dip in price. Now imagine that you held it just long enough to break even. The beauty is that when you swing trade you free up cash to try other stocks that interest you. Let’s face it, sometimes you can buy a stock and it does nothing and you simply get bored. With swing trading penny stocks you can always move on to a new one.
Are there any disadvantages to swing trading penny stocks?
Of course there are! They can drop off a cliff a few minutes after you buy them. You can lose every dollar you invest in them. You can end up owing taxes on gains and you can end up paying multiple broker fees. They are risky but they can also be quite entertaining as long as you only risk money you are willing to lose. Remember, trading stocks is not easy. You have to be willing to put in a great deal of time researching and learning as much as possible before you even attempt getting into the market. However, swing trading penny stocks can truly be rewarding when done correctly with the right timing.
Do you have any experiences swing trading penny stocks? Please share your comments below!
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