Penny Stocks vs Higher Priced Stocks

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As a beginner trader one of the toughest decisions to make is choosing your niche. Your time window you choose to trade in, the assets you want to trade, the broker you want to use, and more.

One of the hardest decisions a stock trader has to make is if they choose to trade penny stocks, or higher priced stocks. This can be especially difficult for traders who intend to use small accounts.

Below I am going to list the pros and cons of both penny stocks, as well as higher priced stocks.

Pros of Penny Stocks

  • Cheaper Shares.                                                                                                                      This is most likely the biggest reason why many traders decide to trade penny stocks. The cheaper the stock, the more shares you can buy. The more shares you have, the less of a dollar value move the stock needs to make money. For example;

2 Traders (John and Jenny) have $2,000 Accounts each. John buys Stock “EFG” for 1000 shares at $1. Jenny buys Stock “ABC” for $20 shares at $50. If both stocks move $1…

John just made $1000, but Jenny only made $20. This is primarily due to the percentage move that just happened.

Both stocks moved 1 dollar, but the stock that John traded just made a 100% move, vs Jenny’s stock which made a 2% move. This directly leads to the second pro of penny stocks..

  • Bigger Percentage Gain.                                                                                                 Penny stocks unlike other higher priced stocks are much more likely to see 50%, 100% even 200% gains if the right market conditions are among us. It is much easier for a stock to go from $1 to $2 than a $50 stock to go to $100. This is typically because a lot of smaller priced stocks have smaller floats. People are aware of this and try to take advantage of the possibility of a big percentage return.                                                 Bigger percentage moves X More shares = More profit

 

  • Faster Moves/More Explosive Moves.                                                                           This is referring to how fast the shares will often rise. In the chance that a $50 stock does go to $100, is will usually take some time for that to happen. Usually “bigger floats” require more volume to make the moves they need to make. For the same percentage move on a one dollar stock, its not uncommon that the stock can hit that 100% move in the same day. Simply because of all the attention it attracts being so cheap, plus not requiring  a massive amount of volume to move.

Cons Of Penny Stocks

  • Extreme Volatility Can Be Your Enemy.                                                                    While volatility can be your friend if the stock is in your favor, it can be your worst nightmare when it goes against you. For the exact same reasons that make a lot of penny stocks do insane moves ( small float, cheap shares, more attention), these things will work against you when the stock turns the in the other direction, especially if you are longing (buying) these stocks.

 

  • More Commissions.                                                                                                         Depending on the broker you use, buying lots of shares can cost you a lot more in commission over time. The broker that I use charges about $5 per 500 shares (buy 500 shares + sell 500 shares = $5). This means to buy 2000 shares of a cheaper stock, it would cost me a total of $20 dollars. Yikes. Compared to if I bought and sold 200 shares of a higher priced stock, it would only cost me a grand total of $2 . With that low of a commission, I wouldn’t even hesitate to get in or out. However, when you have higher commissioned pricing, you start to hesitate because you most likely don’t want to lose that $20 , just to try and get back in later and spend another $20. *This most likely does not apply to brokers who have a flat fee for commissions

 

  • Halts Happen More Often.                                                                                                    In penny stocks, because they have the tendency to make huge moves in such a small amount of time,  they are often halted by the sec for small investigation. Halts can take place for 5 minutes, 10 minutes, 20 minutes, all the way up to months. I’ve personally witnessed traders who have been stuck in a halt that lasted over month. Imagine your hard earned money being tied up, not knowing when its going to be released, if at all. As well as you not knowing the price the stock will open up at, its a huge risk some traders are willing to take.

 

  • More seasonal/ Periodic.                                                                                                    The penny stock world is known for droughts or hot and cold streaks that can last for awhile. Obviously the entire market fluctuates throughout the year, but for the most part there will always be higher priced stocks in action because of how many there are as well as the price ranges. I consider higher priced stocks to be priced between $10 and $300. Obviously there are higher priced than that, but the majority seems to be within that range. With penny stocks, you could have incredible moves for 3 months, but then barely anything for 6 months. This is fine for a trader who doesn’t mind that break, but the most of us prefer something a bit more consistent.

 

  • Less Trustworthy.                                                                                                                Penny stocks are usually penny stocks for a reason. The lower price indicates to me there value, as it should. There is a reason why Google, Apple, Amazon and Netflix prices for there stock are on the high side. Because of the cheap prices of penny stocks, traders must be careful of trying to hold them overnight. Penny stocks have a much higher chance of being desisted than higher priced stocks, or losing the majority of its value overnight. In no way am I saying that bad news or bad situations can’t happen to higher priced stocks overnight, but i would definitely be more skeptical about holding penny stocks overnight.

Pros Of Higher Priced Stocks

  • Less Commission.                                                                                                          Depending on the broker you use, trading higher priced stocks with smaller size with cost you less over time rather than buying or selling tens of thousands of shares. Some brokers do charge on a trade by trade basis with a fixed rate, so in that case it will not matter how much shares you use. But if you do have a broker that does charge based on share size, then it will be beneficial to trade higher priced with less size because you can get in and out of a trade whenever you see fit.

 

  • More Trustworthy To Invest In.                                                                                  Higher priced stocks can often be actively traded as well as invested in because of the trustworthiness of the company behind it. Stocks that are higher priced are usually priced that way for a reason; because the company has value. You might not ever see Amazon or Google just disappear overnight like a lot of penny stocks do.  Yes there are higher priced stocks that will have bad news and will lose 10%,20%, 30%, but in my opinion it is much less likely to happen in the higher priced region verses the penny stock world.

 

  • Moves Are Slower.                                                                                                              Now, some traders are going to think this is a bad thing. Well it depends what your tolerance is. There are traders that love the super fast spikes and dips in a stock, but that requires a lot of patience and quickness at the same time. There are other traders who prefer to allow there position to calmly go in there favor. Slower moves means that you have a heightened ability to stay relaxed through certain moves, unlike a lot of penny stocks where they can be so volatile that  they shake you out of the position before the move even got started.They don’t mind if it takes hours, or days for their target to hit, they will gladly sit through it and prefer it that way.

 

  • All Year Round.                                                                                                                    About 3 out of 4 stocks follow the overall market and these and to be more higher priced stocks. Unlike the penny stock world that seems to be steaming hot one month and then completely absent the next 2 months, the higher priced stock world has more consistency behind it. That doesn’t mean that they are always going up. It could be a bearish market, but even then it often means there will be something to play on the short side. All markets will also also have a dip in volume around the summer time but even then, there are usually still higher priced stocks to play, just not as much as there were during September to march.

 

  • Halts Less Often.                                                                                                                Halts happen less for higher priced stocks for one major reason; They rarely ever have those huge explosive percentage moves that the penny stocks have.                     Remember, a $5 dollar move on a $1 dollar stock in 2 minutes appears to be way more suspicious to regulators than a $5 dollar move on a $50 dollar stock.Its not about the dollar increase, its about the percentage move that will often trigger the halt.

 

  • More Range.                                                                                                                            This sort of makes up for the lack of explosive moves that the penny stocks tend to have. Traders are often under the illusion that when you buy higher priced stocks that the profit potential is no longer worth it. I am guilty of thinking that way as well in my earlier days. The truth is that high priced stocks have tremendous range since they are higher priced in the first place. Remember 5% on a 1 dollar stock is only 5 cents, but on a $50 dollars stock 5% is $2.50 dollar move. If you ask me, I would rather put 100 shares into a $50 dollar stock($5,000) and try to get the $2.50 dollar move to make $250 rather than putting in 5,000 shares into a $1 dollar stock ($5,000) and hope for a 5 cent move to make that same $250 dollars.

Cons of Higher Priced stocks

  • Higher Priced Stocks Require More Money.                                                                      This is the only real downside I see to trading higher priced stocks. Since they are higher priced, you need a higher amount of money. Now, what I did (And i’m not recommending it) was use margin. There going to be traders who will tell you don’t, but when i am trading 100 shares of a stock on margin, you can easily manage your risk compared to you using margin on a penny stock.                                                                                                                                                                                                                  I would recommend that you NEVER USE MARGIN ON A PENNY STOCK.  It is much harder to manage with a high amount of shares, High volatility, as well as increased risk for a halt. This is not advice telling you to use margin however.

At the end of the day, you have to choose what decision is best for you.

The #1 Trading Skill That Professional Stock and Options Traders Possess

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Buying breakouts, shorting pops, holding through uptrend, hammering the washout short. So many different skill sets that so many of our favorite traders attain.

Some of us believe that being able to hold for an extended period of time is a top trait in a trader. Well this as top skill that a lot of professional have, however it is not the #1 trait I am talking about.

The ability to hold through a trade to maximize profit or to allow the trade to go in your favor is exceptionally difficult because we often get scared when the stocks start going against us, anxious when the stock starts moving in our favor, or just out right bored our position isn’t moving at all.

The ability to sit through this all in order for your plan to work requires grate discipline and patience. Not just for a week or month, but for your entire trading career.

The ability to sell short is also a great advantages strategy to have. Not just because of timing, but depending on the type of stocks you are shorting, the shares might be hard to borrow and hard to locate.

This means you cannot just short when you want to. You have to have the correct presence of mine to determine if the stock will be a good stock to short today or next week, and begin to pay for borrowing the shares.

Now bigger name stocks as well as higher price stocks usually don’t have that problem because they tend to have plenty of short shares to never run out of.

However if we are strictly talking about low float, low priced stocks, then being able to reserve short shares for the correct stock to short later in the morning or day is a commendable trait.

Out of both of those examples along with much more traits that make a successful trader the success that he/she is, I have my own belief that…..

Fearlessness is the ultimate trait the professional traders need to have in order to not only be successfull in the first place, but to continue to grow as traders and evolve into better traders over time.

This fearlessness in trading can be spread out into different areas of stock trading.

Lets talk about buying and selling. How many times have you looked at a a chart setup you liked and saw the opportunity to get involved, just to hesitate when the perfect opportunity arises. You now watch as the stock moves in your favor without you.

This hesitation is usually a form of fear. Why else would you not attack the opportunity to take part in a setup that you favor over others and is proven to work over time?

Same question. Why would you not shot  a wide open layup if the opportunity was given to you? Maybe because you don’t want to mess up? Maybe there is too much people watching? Maybe your are to anxious? Maybe your afraid?

A player or trader does not give up the opportunity of a great potential trade or shot unless there is a better one they anticipate coming.

If they don’t see a better opportunity, then they are in the best position to make it happen. They are the best opportunity, and they pull the trigger without hesitation because they know that.

Same goes on the defensive side when taking losses. How many times have you or a trader you know had a set stop loss but as soon as it came time to take the loss, you moved the stop loss lower?

I’ve done it before, we’ve all done it at some point. We do this because we are afraid of the loss, even though we said this was the set amount we were willing to risk.

The professional trader isn’t afraid of letting his stop loss target hit.

He does not change his mind when the trade stops going in his favor, he does not move his stop loss. He is not afraid for the simple that before he entered the trade he truly accepted the risk.

So when the stop loss comes close to hitting, he is unbothered by the loss. He can stomach it.

He will continue to trade as if he never took the loss, and he wont allow that loss to cloud his judgement going forward.

 

The Good, The Bad and The Ugly: Stock Chatrooms

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If you have been in the trading community for a while, then you have most likely come across the world of “chatrooms” before. This is where you can find a group of traders who typically trade together at market open and spit ideas back and fourth about possible decisions each trader might be making or stocks they have interest in.

There are a lots a trading chatrooms on the internet that will try and persuade you to subscribe to them for a cost, and in return they often make plenty of promises to make you a better trader.

On this post, I am going to run through some pros and cons of stock chatrooms. The goal is to make you self aware by helping you distinguish the difference from a good stock chatroom, and a scam chatroom.

Pros of Stock Chat Rooms

  • Trading Community.                                                                                                                 I believe this is one of the most important things to have while trying to trade stocks, especially if the goal is to trade full time. Trading can be lonely, especially if you are trying to do it by yourself. Having the right chatroom can give you that sense of family when you wake up to trade. You get to know people and there different personalities along with their trading styles. Some chat rooms even do monthly meet ups to put a face to the names.

 

  • Advice.                                                                                                                                     You could be a novice trader or a an experienced trader. Somewhere down the road you are most likely going to need advice, and the sooner you can ask for it, the better. There are a some chat rooms that have members and moderators who are very helpful and if you have questions they are often glad to help. They are often glad to help because they too were once in that position.

 

  • Mentoring.                                                                                                                           Some chat rooms offer paid mentorship for private sessions. I would test drive the chatroom first before doing this however, just to get a feel of the room and to make sure the moderators prove to be knowledgeable about trading.

 

  • Shadowing.                                                                                                                            This to me could be the most beneficial pro of a chatroom. However not to many chat rooms provide proper shadowing. What i mean by shadowing is a chatroom where the moderator ( hopefully a successful trader) actually shows the memberships when hes buying and WHY. Not simply alerting members when hes buying, but actually teaching them the method for coming to the conclusion to buy or sell.

Cons of Stock Trading Chat Rooms

  • Fees.                                                                                                                                         This really grinds my gears. I understand that traders are trying to make extra income on the side, but some of these monthly fees for chat rooms are absolutely ridiculous. $300,$400, $500 dollar and up per month to just be in a community with other traders. I mentioned earlier that it is very important to have a community in trading, but with hefty price tags like that, i’m sure you can find cheaper trading buddies. For those prices the chatroom needs to be able to actually teach you how to trade for real, not just follow alerts.

 

 

 

  • Pump and Dumps.                                                                                                                The good ole pump and dump chat. For those who are unaware of what this is, time to break it down in simple terms. Group of people, or just one person decides to open a trading room where they promise to give you the best stock picks, or to alert you whenever they are going to buy. GREAT!!. It sounds sooo enticing to beginner traders. They wouldn’t have to do research, look at the market after hours, make hard decisions. Why would they when they can just buy and sell the same time as the people running the chatroom. The problem in almost all cases is that the people that are running the chatroom are simply going to buy ahead everyone else without telling them, and then give them a later alert so that the heard of members can push the price of up in the favor of the moderator of the chat room. The moderator then sells into the push and leaves everyone else holding the bag as the stock dumps, and it almost always dumps, leaving the majority of members with a loss. Those members will quit after awhile, but there are always incoming new members, so its an everlasting cycle.

 

 

  • No Self Reliance/ Independence.                                                                                    This is characteristic that any chat room can inflict on traders if the trader is not self aware of it. Traders who use chat rooms often becoming way to dependent on the chatroom, to the point where if the chatroom were to vanish into thin air, the trader would literally be in a world of hurt because he/she is unaware of how to trade for themselves. Being in a chatroom, especially at the beginning of your career can make a trader believe that trading is so simple because trading in a chatroom requires nothing but following the person charge. Then when that chat room is gone, it becomes a rude awakening for that trader. It is better to use the chat rooms after you develop the ability to trade by yourself, and then you can use chat rooms for extra tips and support.

 

  • Stuck Up/Not Helpful.                                                                                                             In the Pros section I mentioned that some chat rooms can be helpful for advice and shadowing. Well, here is the other side; a lot of people in these rooms are stuck up and arrogant. I’ve been through my fair share of chat rooms and what I witnessed, in my opinion, was borderline bullying. We were all new traders at one time, so it literally tears me apart and makes me angry when a new trader comes to a chatroom of more experienced traders and is getting dragged and humiliated because he simply asking questions. I’m sorry Bill, we all didn’t come out of the womb knowing all there is about stock trading. It may seem dramatic, but learning to trade is very intimidating in itself, so that first thing you or any normal person would do is ask for help. I recommend that if you are on the beginner side of trading, that you find a more friendly chat room where the members want to help each other grow, not tear each other down.

 

Short Term Charts VS Long Term Charts

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One of the biggest mistakes we make as a trader is the time frame of chart that we choose. We often like to claim one time frame as our own. “I only trade on a 5 minute chart, i don’t pay attention to anything else.”

Now when you are just starting to trade, i do recommend that you find a specific chart time frame that is suitable for you trading style. Reason being too many new traders are often all over the place with their chart time frame. One day its the 1 minute time frame, 3 days later its the 15 minute time frame.

Today i’m going to talk about the benefits of the Short Term Chart vs Long Term Chart as well as the downsides of each of them. My definition of  short and long term chart may differ from others.

Short Term Chart (30 Second – 30 minute – Time Frame)

These time frames are probably the most popular stock charts for Day Traders. Day traders use these charts because they are more detailed in showing the most current action on a tick by tick basis. The 1 – 5 minute charts are the best example of that.

Every minute or 5 minutes there is a new candlestick as well as new volume information that comes in which is beneficial for traders who are looking for a quick scalp or quick buy and sell.

The Downside to the shorter term charts, that i have experienced my self, is that relying strictly on a time frame that is too small will more often than not, shake you out of your position.

You are witnessing so many small ticks and movements that make you feel like the stock will tank, and then 5 seconds later make you feel as if the stock will skyrocket.

Long Term Chart ( Hourly – Weekly)

These time frames are more popular for swing traders as well as long term investors.They don’t need to pay attention to a 1 minute chart if they intend to be in the stock for 2 months.

Using the longer term chart helps guide the trader in seeing where the stock could potentially fall in the longer, distance future. Nothing about a 5 minute chart is going to tell you what that stock could do 2 months from now.

A longer term chart can also quickly show the trader how much range potential there is in a quick amount of time.

The only Downside I can see for the longer term chart is that it doesn’t show you the any detailed movement that is happening right this moment, but like I explained, most people using longer term charts are not in the stock for a short amount of time.

Solution

I’m not biased of any chart myself as I trade different time frames all the time. I believe the real solution for any trader, whether it be day trading, swing trading or long term investing is to have 2-3 charts of the same stock showing different time frames.

For example, If I want to day trade “AMD”, then I would personally have the

  • 1 Minute Chart
  • 3 or 5 Minute Chart
  • 15 Minute Chart

This gives me both, the details i need to trade it right now while still giving me a broader picture of the larger trend, at least for the day.

For A Swing Trading or Long Term Investing ….

  • Hourly Chart
  • Daily Chart
  • Weekly Chart

This gives me priority to a longer term picture with the daily and weekly chart, but still giving me some intraday details about the stock with the hourly candle.

So what ever type of trader you are, consider throwing away the idea that only 1 time frame is better for you, and consider adding some more time frames.

Not too much to the point where you are distracted, but more than one so that you can have a multiple opinions about the stock.

It will also give you more confidence to take the trade if you see that 3 of your charts are all indicated the same move. Good luck :).

 

#1 Piece Of Advice That Will Automatically Change The Way You Trade Forever

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This is probably the best advice I have ever gotten about trading that complexly changed the way I think when I enter a trade. If you are not thinking like this for your trading, it will automatically make you a better trader when you hear it.

What is this #1 piece of advice??

Trading in terms of probabilities instead of trading on a trade by trade basis.

This is from a YouTube video from Mark Douglas and the video is called “How to think like a professional trader”. I could ramble on for a long post, but I will try and keep this one short and sweet.

Many beginner traders trade on a trade by trade by basis. This means that when ever they put a position on, they are worried about this one trade there in. If they win, they get joyous, if they lose, they feel down.

And both will effect the way they think about there next trade.

However, what Mark Douglas says in the video is that..

Traders need to think about their next 20 trades instead of their next trade. 

This all starts with having your EDGE.

Your EDGE is whatever method you have that consistently puts the odds in your favor. For example,

If you have a chart pattern that you paper trade 50 times and it shows that it has a 66% rate when you trade it, that is an edge. Because you have something that puts the odds in your favor (66%).

Now when you have that edge, you are now aware that over 50 trades, you know you will be profitable over time. However, you don’t know which trades out of the 50 will be winners and which ones will be losers.

Therefore, you would no longer need to focus so much on winning the trade in front of you, and that sense of relief will also allow you to put on trades easily and effortlessly because you know overtime it will work.

Another question Mark Douglas asks is “If you know it will work overtime, why would you be afraid to put on the position/trade?”

The reason we get afraid to put on a trade is simply because we are too worried about what is going to happen in this trade.

Obviously there is more to trading, but to simplify it,to be profitable you need do 4 things…..

1. Find your edge; Something will will put the odds in your favor over time

 

2. Allow your winners to run, cut your losses short (so that even if you win percentage is 50%, you will still be profitable)

3. Test your edge before you take it to actual markets

4. Trade your edge with real money remembering that its not about the trade you are in now, but about the next 20,30,50 trades you are going to take.

When you think like this you will not have to struggle with cutting losses as much because you don’t see a need to hold on to losers if you know overtime you will win.

 

 

 

2 Fatal Myths about Stock Trading

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When people start thinking about trading for extra income or for a living, their individual opinion of how long they have to trade for is often skewed.

On one end, you have the people who believe trading is this easy task that you can do almost everywhere comfortably beside the beach while sipping on your alcoholic drink. Not saying this can’t occasionally possible, but to trade like that the majority of the time is more unrealistic than you think.

The other side believes what they watch in stock trading movies. The pit like atmosphere, everybody yelling at each other across the room, taking phone calls for other people and putting there orders in.

Being in front of the screen for 8+ hours during the day is another thought that crosses their mind because they believe you must be present the entire time during market hours,

Neither of these beliefs are necessarily true. Lets start with myth number one. Continue reading 2 Fatal Myths about Stock Trading

Stop Trying to Predict Stocks

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“What if i bought Amazon and held when it was a dollar? I would be a billionaire.”

We are all millionaires and billionaires in hindsight. It all sounds so simple when we look back at it. But in reality, in the moment, it almost never works out that way we make it sound.

How much of us look back at a daily chart and see a stock we missed out and say,

“Aww man, if I put X amount of shares at dead bottom, and sold right at the top, I would have killed it”

This type of thinking is not necessarily bad. It helps you see the possible potential in some of stocks we play. But there is a downside to thinking like this as well..

TRYING TO PREDICT STOCKS

When we constantly see plays we missed it can create F.O.M.O (Fear OF Missing Out)

Since all these perfect scenarios are playing through our minds, it far too often leads to us pulling the trigger too fast on the next “opportunity”

We think, “Ok , this is gonna be the big one”, and before you know it..

The stock is tanking on you, you sized in too big, no news, no volume..

Anything can happen when you are too eager to find the next stock. I always preach the importance of getting early. However, that’s after you do your research and the stock meets your criteria of type of stocks you trade.

SOLUTION? FOCUS ON REACTING RATHER THAN PREDICTING.

This is what most of the best traders do. When you react instead of predict,

You are allowing for confirmation to take place and then quickly hopping on for the easy ride, instead of trying to anticipate it and letting that “ride” take you somewhere you don’t want to go.

You don’t want to be the trader that sees positive news and starts buying instantly. To some people they ask why would you not do that? Its positive news. Its because..

Not all good news influences the stock to go up, and not all bad news influences the stock to go down.

The news that comes out could sound soo sweet to the point where you think “There is no way this doesn’t go up.” But what controls the stock price at the end of the day?

News…? or Buyers and Sellers?

News and catalysts mean nothing unless the traders trading it view the news and worth buying or selling more. Once you as a trader understand that concept,

It will be very hard to continue attempting to predict stocks.

But will be easier to lock in profits after reacting. Good luck.