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Welcome to post 20.
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Last time we discussed how to repair your broken watchlists. The most important thing to remember was the Relative Volume (RVOL) indicator.
What about the other half this scanner setup, now? The supply side.
The float.
When trading penny stocks, and you do not know the float prior to hitting the buy button, you are essentially playing a wild guess game. Throwing darts blindfolded. Simply put, the float is the number of shares that are actually available for trading. Total shares - locked up by insiders and institutions.
The golden rule of penny trading is that there is nothing that's complicated about it; it is simply demand and supply. Nothing else.
Normally, a "Low Float" is defined as less than 10 million or even 20 million shares. These are your everyday meals. The sweet spot - and nothing more. However, when heavy volume is faced by a low float penny stock, it moves fast. It moves clean. In fact, it follows the support and resistance levels on the chart. You can reduce your risk and not lose your mind.
Then there's "Micro Float".
We're talking tiny. Less than one or two million shares. This is where magic happens in the market. And the absolute horror!
Think about it. Let's say a stock that has 1 million shares of float is suddenly seeing 15 million new shares traded in one day at the opening bell. Perhaps due to the size of the press release. The company is selling its entire stock and the trading volume is 15 times that of the total stock. The provisions simply disappear! Demand increases by a factor of more than 20 per cent each year.
This is the way a 50 cent penny goes from $4.00 in 20 minutes. It's beautiful to see.
However, there's a pitfall to kill the accounts.
Micro floats almost have no liquidity on the down side. Once the excitement has faded and the enthusiasm wanes, so do the buyers. Just can't get my bid anymore. You might purchase 5k at the peak, and attempt to sell it when it is red... and find that you are not even filled near the current price.
There are no buyers left. In the end you crash the price you set yourself. You suddenly have to pay a lot of pennies for the quick scalp. You become trapped. Just another bagholder.
Trade for consistency of low float. Only trade micro floats when fast, ruthless and sizing down. Don't let the extreme volatility seduce you.
We'll meet again the next post as this.
(Brief summary of the above: This post explained the difference between low float stocks and micro float penny stocks. As we said, when volume hits, the price spikes in the tiny supply it's created, but if it's tiny, there's massive liquidity issues that make it difficult for traders to get out at the right time when the price drops.