On Wednesday AMTD Digital Inc. (NYSE: HKD) was back on traders’ radars…
The stock went parabolic from roughly $50 to nearly $300. So naturally, I received questions about it in yesterday morning’s SteadyTrade Team webinar…
How can you trade it? What’s the pattern to look for?
But honestly, to me it’s untradeable.
I get it … It’s exciting and entertaining to watch a big runner like HKD…
After all, you could buy one share and potentially make $100 or more. But there’s also a flip side to that.
And there’s one main reason I advised traders to stay away from it.
The One Blaring Reason to Avoid a Stock Like HKD
When you’re trading volatile stocks like the ones we do, there’s a lot to pay attention to…
Float, volume, news, support and resistance levels…
Then you have to make a trading plan with an entry, exit, and risk level.
But there’s one thing that might not cross most traders’ minds before they execute a trade.
The stock’s spread…
What’s The Bid-Ask Spread?
The stock market is like an auction … The bid is how much a trader is willing to pay for the stock. And the ask is how much a trader is willing to sell the stock for.
The difference between the two is the spread.
Typically in high volume, liquid stocks the spread is only a penny.
In sub-dollar and sub-penny stocks, the spread can be fractions of a penny. And in higher-priced stocks, the spread can be pennies or up to a dollar.
Why The Spread Matters
As a trader, you want to trade stocks that have a close spread. That means you can get in and out within a penny of your stop, and it’s not a big deal.
But when you start trading stocks with a wide spread, it can significantly increase your risk.
And over the last two days, HKD had a spread of up to $10. That’s just insane…
Basically, if you bought HKD on the ask and sold it on the bid, you’re down $10 per share without the stock even moving…
I don’t even know how to trade that.
If you try to trade it like a regular stock, you could buy 100 shares, but on one downtick you’d be down $1,000 … And that’s just one tick!
Stocks move up and down all day. Nothing goes straight up or straight down…
Green is a sale higher than the last, red is lower, and white is unchanged.
This is how most stocks move all day. They go up, down, and in between.
If you’re in a trade in a stock like BEAT, you can easily get out at your stop, or even a cent or two below it.
But when you have a $10 per share spread, how can you plan a risk level with that kind of spread and volatility?
Once it hits your stop, it could be another $10 per share lower before you get out. And that’s if your order even gets filled.
For me, that makes it untradeable and the only reason I need to avoid the stock completely.
These insane runners are fun and entertaining to watch…
But they’re almost impossible to trade. You have to deal with halts, a huge spread, and moves from $50 to $300 and a drop back to $150.
We love crazy big moves. But there’s a limit to the crazy.
If you want the lowdown on which stocks to watch and avoid — join me every morning and afternoon in live SteadyTrade Team webinars.
I answer questions and break down tickers and trade ideas to help you get on the path to becoming a successful trader!
Lead Trainer, StocksToTrade