Nothing is better than making fast money in the stock market – and trading small-cap stocks is a great place to do it. Small-cap stocks often have explosive moves that can be very profitable. They are too small for the big money to bother with, so trading them is less competitive. And because they get little or no coverage by analysts, profitable inefficiencies exist that aren’t available in more heavily traded stocks. Check out this strategy to increase your odds of catching that big winner among small-cap or micro-cap stocks.
One of my favorite strategies for small-cap stocks is catching major reversals. Without the opinion of professional analysts, small-cap investors must decide for themselves whether to buy or sell. And once they decide, they are often slow to change their minds when conditions change… or they just don’t notice when the news comes out. That makes for excellent trading opportunities when small, up-and-coming companies overcome their growing pains.
Screening For Reversal Opportunities
Here’s how it works: Go to www.barchart.com. (Click on the Stocks tab, then under Most Active, click on Volume Advances. You don’t need to sign up for an account). Look for stocks priced under $5 that have at least a 500% increase in daily volume. You want to find a stock that had been going down in recent months, but it shot up yesterday or today. Don’t buy it yet! You need to stalk it. Wait for at least 2 days. Chances are, it will head back down for 2-6 trading days in a row. The day after the next up candle could be a good entry point. If it’s going to continue up, that’s the right spot to enter. If it drops below the daily candle of the day before your entry day, exit the trade; it’s not going to continue the uptrend.
About half the time, this type of trade fizzles out. It will just sit there or move sideways after that – just exit the trade and move on to the next one. But when you catch one, you have caught the tiger by the tail – and you are off to the races! The stock move will often keep going up for 1-4 weeks, sometimes longer.
It’s up to you how long you want to hold it. I like to sell when it looks like upward momentum is slowing down. Make sure you only trade stocks with at least 1 million shares average volume per day. Otherwise, there might not be enough trading volume to get out when you need to sell.
I really like to know the reason for the move up, if possible. Some news has usually come out that traders are reacting to. If the news affects the long-term profitability of the company, the stock may continue up for years to come. The news can affect how long I want to hold the stock.
Latest Reversal Candidate: Wanda Sports Group Company Limited
On February 18, 2020, I came across Wanda Sports Group Company Limited (NASDAQ: WSG) on Barchart.com – see chart below. It’s up over 900% in volume today. I expect the stock to pull back for a few days. Then, if the news is good and the stock starts to climb again, I’ll buy it.
The other strategy I like is to be on the lookout for is big news that will certainly drive a small company’s stock up – but no one seems to have noticed the news yet. Buy before the stock pops – beat the rush for a big profit.
Good luck trading!
Article By: Gregg Killpack