The 7 Rules of Trading Cheap Stocks

By March 7, 2019trading

Have you noticed that the biggest percentage-gaining stocks on the average day or week tend to be cheap, low-priced stocks?

That’s because these companies are so tiny it only takes a tiny bit of excitement to wake them up and get the stock price moving.

A lot of traders love to jump aboard these massive movers, so this post is here to help you navigate the murky waters of the lower end of the stock market.

Do yourself a favor: Before you jump in, learn some strategies and make sure you know what you’re doing. Follow the advice you’re about to read. Let’s do this!

Click here to download the key points of this post as a PDF

What Is a Cheap Stock?

Ask 10 different traders what a cheap stock is and you’ll get ten different answers.

Some will say it’s a stock trading at a value so low compared to its earnings, it would make a young Warren Buffett drool. Others would say it’s a stock that’s fallen from grace, once loved but now loathed by the market.

So how do I personally define a cheap stock?

First, it’s a stock that’s under $10. The companies that trade under $10 are often new and small, with the potential to increase significantly in value in a short amount of time.

Second, the best cheap stocks definitely have a reason they could jump up in price sometime soon …

Maybe it’s a great chart setup, like a breakout to all-time highs or a news catalyst bringing in a massive wave of buyers. Sometimes, it can be the growing hype around a stock on Twitter and online forums.

If you’re looking for cheap stocks to buy, the lower end of the market can be a great place to search. Generally, when a stock is priced so low, Wall Street won’t cover it — that means less competition with top traders and hedge funds.

Instead, you’re usually competing with unsophisticated traders and investors at the lower end, and you know to give yourself the benefit of education!

Cheap Stocks to Watch Right Now

Here are a few examples of some plays I’ll be watching over the next few weeks.

These aren’t necessarily the greatest stocks overall, but they all have something interesting going on. Notice that they’re all in hot sectors. Often times it’s more about being in a great sector than being in a great stock.

Without further ado, here they are:

Puration Inc. (OTCMKTS:PURA)

PURA is a little OTC stock that’s in the super-hot CBD space. Stocks in this sector have been on fire the past few years with ongoing legalization of marijuana.

There’s a lot of hype around this little company. Much of the hype is surrounding the company announcing it will start producing a Cannabinoid sports water drink.

I don’t know if I’d drink it, but the market loves any mention of this kind of stuff.

PURA-cheap-stock

Puration Inc. (OTCMKTS:PURA) Chart (Source: StocksToTrade.com)

Blink Chargin Co. (NASDAQ:BLNK)

They say electric cars are the future, right? BLNK is a Nasdaq stock in the sizzling electric car sector.

BLNK makes charging stations for electric vehicles, and with the sector all over the news, this is a sideways play for the industry’s growth.

The stock has run a lot in the past and may be in for another burst sometime soon.

BLNK-cheap-stock

Blink Charging Co. (NASDAQ:BLNK) Chart (Source: StocksToTrade.com)

HyreCar Inc. (NASDAQ:HYRE)

HYRE is a Nasdaq stock that’s been spiking for a while now. The company rents cars to rideshare drivers using the Uber and Lyft platforms.

With Uber and Lyft planning their IPOs, a lot of traders are using HYRE as a play to get in on the rideshare IPO euphoria.

HYRE stock

HyreCar Inc. (NASDAQ:HYRE) Chart (Source:StocksToTrade.com)

Electrameccanica Vehicles Corp (NASDAQ:SOLO)

SOLO — another Nasdaq company — produces electric cars.

Not all electric cars are created equal. Hey, nearly everyone wants a Tesla, right? That’s probably true … but if you see the monstrosities that SOLO is putting out, you might change your mind about electric cars altogether!

If you haven’t seen a SOLO car yet, do a quick web search. Ridiculous, right?

As much as I think SOLO’s cars are an absolute joke, the sector’s damn hot and the stock could definitely run.

The stock spiked recently and held its gains pretty well. They recently raised money and sold some stock. So, this is definitely one to keep a close eye on.

SOLO-stock

Electrameccanica Vehicles Corp (SOLO:Nasdaq) Chart (Source:StocksToTrade.com)

The 7 Rules of Trading Cheap Stocks

Whoa, Nelly! Before you start trading cheap stocks, you need a few pointers. Just because some stocks are cheap doesn’t mean you should rush in and buy without a strategy in place.

There’s a lot of technique involved in trading these stocks — you definitely need to know what you’re doing.

To help you with that, here are 7 rules to help get you on the right track when finding, analyzing, and trading these stocks. Follow along …

#1 Look for Chart Patterns on Cheap Stocks

If you had to pick a go-to analysis for trading lower-priced stocks, chart pattern analysis should be at the top of your list.

Traders use chart patterns to track the footprints of other traders in the market. With a well-trained eye, you can spot fear, greed, frenzy, and disinterest — you can learn from the emotional extremes.

There are millions of chart patterns, and you can make it as complicated as you like … but don’t.

You’re generally better off learning a few simple patterns like the back of your hand. Keep it simple. Pick simple breakout trades, the dead-cat bounce, or the supernova pattern.

Find what works for you. Be an absolute master of your chosen patterns.

#2 Have a Trading Plan

No matter what you trade — tech stocks, cheap penny stocks, blue chips, futures, or options — it’s important to have a trading plan.

A trading plan is your set of instructions that detail your trading operations. It often includes specific details for your risk level, your fave trading setups, the types of stocks you trade, entry and exit points, and so much more.

Think of it like one of those cool technical construction blueprints drawn up by an engineer or architect before a house is built.

Before a single brick is laid, there’s a well-defined set of instructions to guide the construction crew. At all times, everyone involved knows exactly what they’re responsible for and what to do.

Create your trading plan in the same spirit. Consider every single decision you’ll need to make in your trading: Do you buy more of a winning stock? Do you take a day off after a big loss? When do you jump into a trade and when do you exit? Build it all into your trading plan.

Well-planned trading is smart trading!

#3 Use Limit Orders, Not Market Orders

When you find a stock you want to buy, you’ll have to choose between buying with a market order or a limit order.

With a market order, if you tell your broker to buy 10,000 shares at market, they’ll buy 10,000 shares at whatever price the broker can get them at.

With a limit order, you set a price limit. For example, you might request that the broker buy you 10,000 shares at no more than $1.50. The order will be there until the broker is able to grab 10,000 shares at $1.50 or below.

A novice trader might think that the market order is better … you can get those shares super fast, right? Yes. But it’s a terrible idea.

Here’s why: Cheaper stocks often don’t have much liquidity, meaning there may not be many shares available for you to purchase.

If you try to get everything at market, your order might be filled at a price way higher than you wanted — or expected. That can cost you hundreds, thousands, or even tens of thousands of dollars, depending on the size you’re trading.

Don’t be dumb. Learn to think like a savvy, intelligent trader. In illiquid markets, use limit orders!

#4 Don’t be Afraid to Walk Away from Cheap Stocks

Newbie traders can way excited when they find a promising trade. Sometimes they’re so keen on the trade, they end up doing something stupid.

Here’s the deal — and I can tell you this from experience — the market’s always there. Every single business day, the market will open, and you can find more trades.

So, don’t feel like you can’t walk away. Make sure everything aligns just right, including the trade setup, your entry point, and every piece of your trading plan. If something feels off or you’re called away from your post for any reason, always be willing to walk away from the trade.

There’s no rush, trading is a long-term endeavor. Never be afraid to walk away from a trade. There’s always tomorrow …

#5 Limit Your Losses

I don’t care how great of a trader you are, you will have losing trades.

In fact, it’s not uncommon for even the best traders in the world to be profitable on 50% or less of their trades. How are they profitable? It’s simple, their winning trades are bigger than their losses.

That means it’s absolutely necessary to minimize your losses as much as possible. Before you enter any trade, set a price at which you’ll exit if you’re losing money. That’s called a stop-loss.

You decide where to place your stop-loss. It could be 10% below your entry price, where the chart pattern is invalidated, or below a previous key support level.

Whatever stop-loss method you pick, make sure you always set it before you get in the trade.

#6 Follow the News on Cheap Stocks

Low-priced stocks can go on runs of 10%, 50%, or even way higher in a very short amount of time.

These price bursts are often due to a company getting news story hype or a company announcement. That’s mean you gotta keep up with the news and buzz around your favorite stocks and sectors.

If you dedicate just a little bit of your analysis time each morning to searching for any news that could impact the price of a stock, it can help you spot the movers before they move.

Don’t have a ton of time? Use a scanner that can alert you to any news stories related to the hottest stocks or sectors. StocksToTrade can do all that for you with a few clicks of a button. Come and check out our news scanning capabilities with a 7-day trial for $7.

#7 Pay Attention to the Cheap Stock Volume

Imagine you find a tantalizing trade. It has your favorite chart pattern, it’s in a clear uptrend, and there’s a major news catalyst out that morning. The stock is ready to blow!

You’re so excited to jump on the stock, you’re already counting your profits. You just know it’ll be up 20% or 30% on the day.

The market opens and you enter a limit order to buy 10,000 shares at $2. You eagerly wait to get your fill.

But then it all starts to fade. Your excitement wanes when you see few sellers of the stock, and the volume that does go through is tiny — 100 shares here, 200 shares there. You’re not getting any of them.

Depressed, you sit and watch as the stock makes its run of over 20% over the trading day. Yep, you called an amazing trade, but there was no one there to sell you the stock so you could get on board.

Sounds pretty frustrating, right? It can happen a lot. Can you spot the mistake in this trade?

Before you got too excited about the trade, you should’ve looked at the stock’s recent trading volume.

Some cheap penny stocks can trade next to nothing each day. Hardly any buyers and hardly any sellers — those are called illiquid stocks.

So, to save you the future frustration, only look at stocks that have an average daily trading volume of $1 million or more per day. This rule can save you a lot of heartache!

Take Advantage of StocksToTrade Features

Whether you want to actively day trade, or you’re just looking for some cheap stocks to invest in, you want to use the best tools for the job.

What are the right tools? I’m talking about charts, scanners, news feeds, data, watchlists, and more!

In the old days, to get all of these tools would mean countless subscriptions to websites and a lot of software. It was tedious, annoying, and expensive!

Thankfully today, you can get everything you need in one spot. That’s exactly what the StocksToTrade platform does.

The platform is designed by me and a team of active, everyday traders. It’s exactly what we need to fight the battle of the markets each and every day. It really is THE platform created not by software geeks or corporate monkeys, but by real-deal traders.

Here are just of few of StocksToTrade’s powerful features:

  • The ability to scan for your favorite trade setups in real time. Just set your criteria and let the software do the rest.
  • Slick and easy-to-customize charting.
  • High-speed scanning capabilities for news stories, SEC filings, Twitter, and more.
  • Access to almost every stock traded in the U.S., including the pink sheets and OTC markets.
  • And so many more amazing features that we’re constantly expanding on.

So, if you’re currently battling the stock market without a top of the line weapon, it’s time to better equip yourself. Grab a 7-day trial of StocksToTrade for just $7.

Conclusion

Trading lower-priced stocks can be exciting, but it can also be a terrifying, money-burning endeavor if you don’t know what you’re doing.

The competition in the lower end of the market doesn’t always include the sharpest tools in the shed. But that doesn’t mean you should just jump into with guns a-blazing.

Follow the 7 rules above to learn how to play smart in this niche.

Wanna learn more? Add the stocks from this post to your watchlist to track their progress. They all show some exciting potential. They may not be the right trades for you, but they can help you learn more about charting, hot sectors, news, and more.

If you don’t have a watchlist set up or a way to track charts and news, get 7-day trial of StocksToTrade for just $7. You’ll have access to premium charts, news scanning, watchlists and more!

What are your tips for trading cheap stocks? Share your best and worst tales of cheap-stock trading. Leave a comment!

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