If You Like Low-Priced Stocks, Read This Article (Part II)

  • June 22, 2005
  • Rob Hanna

I wish
I had some fascinating new insights into the market action, but the
song remains basically the same.  Upside bias.  Sentiment remains worrisome. 
The indices have had some fairly tight trading while consolidating/pulling back
slightly the last few days.  A sharp move one way or the other could occur soon.

 

In the last couple of columns
I’ve discussed the explosive potential and the dangers inherent in trading
low-priced stocks.  The extreme volatility that can occur with these issues
following breakouts can lead to substantial rewards.  Unfortunately, the risks
are also magnified, since prices are capable of falling even faster than they
rise.  Rather than letting the fear of losses overcome you and writing off
trading in these vehicles altogether, let’s look at a few simple, common sense
rules that I like to apply when trading in low-priced stocks.

 

1)     
Never chase.  While paying up $0.25
isn’t a big deal when trading a $50 stock, it is when trading a $5.00 stock. 
With a $5.00 stock, it amounts to a 5% move.  No matter what you entry
technique, make sure you make your purchase very close to your ideal entry
price.  Otherwise, let it go.

 

2)     
Never purchase without utilizing a
technical setup.  A little slippage is a big percentage, and you need to give
yourself every edge.  Whether you’re buying off daily, weekly, or intraday bars,
make sure you’re aware of your setup (and stop-out point) when entering the
trade.

 

3)     
If you have a nice profit going into
the close, take some off the table.  Look at the charts of the stocks I’ve
mentioned in the last two columns.  Significant gaps all over the place.  You’ve
got a nice trade, don’t let a gap down or quick selloff ruin it.  Take some
money off the table while everything still looks rosey.

 

4)     
If you’re buying a breakout and it
doesn’t follow through within a day or so, just get out.  As above, a healthy
fear of gaps will keep you in the game.

 

5)     
Don’t bet too big.  Many times it will
be necessary to trade a reduced position size so that the volatility doesn’t
drive you nuts.

 

6)     
Once you have a nice profit and have
taken a piece off the table, use a loose stop and trail it higher.  Only sell
when that stop gets hit.  When a stock goes from $3 to $6, people realize
they’ve made 100%, and think they should sell before it drops again.  Resist
that temptation and let it ride.  It may hit $15 or $20 before it’s done.  Don’t
cut your profits short.  If you’ve already taken some profits, and the remaining
position is a bit smaller than you would normally have in your portfolio anyway,
just let it go and see what happens.  It only takes one really big winner to
make up for a lot of small wins and losses.

 

Best of luck with your trading,

 

Rob


robhanna@comcast.net

 

P.S.

Click here for the Hanna ETF Money Flow System.

 

 

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