Day trading small-cap stocks is not something I would recommend to inexperienced traders. But if done correctly, it can offer amazing ROI in a short period of time. $GHSI is not a company you want to own. But that doesn’t mean you cannot make money off it. Once momentum enters a small-cap stock, fundamentals go out the window. 

For those that don’t know me, I am one of Kunal’s students, and I help moderate the BOWS day trading chatroom. Primarily a day trader that focuses on trading momentum stocks, mainly to the long side.

The key for day trading small stocks correctly is to use a proven, back-tested system, and have sound risk management. Today I’ll walk you through my thought process behind my $GHSI trade this morning, and how I approached it:

$GHSI Daily Chart 

small-cap stocks

$GHSI is a recent IPO with a downtrending daily. I always approach small caps stocks a trading vehicle, not something for a long term investment.  Right is a market environment where we are seeing a lot of junk small-cap companies are taking off and following through to the longside. $CAPR, $IMRN, $MDGS just to name a few from the last couple weeks. 

This company was gapping up on news that it was awarded a patent from the Hong Kong Patents Registry. It actually wasn’t even on my watch list until it popped up on my scanner after its initial push through $2 at 9:40 am.

Trade Executions

trading penny stocks

Hindsight comments about what a stock did and why is pointless. The only thing that matters is if/where you bought, and where you sold. $GHSI had room to run on its daily to the mid $2’s, there was strong relative volume, a catalyst, and a low volume pullback to its intraday moving averages before the move had really gotten extreme.

I got long at $1.76 once it started to hold the pullback to the 9 EMA, with risk under the 20 EMA (the green moving average) at $1.64. My plan was to take half of my position off on pop through $2, and take off the rest near the daily resistance in the $2.20’s. I was able to only risk about $.12, and made about .49. 1:4 risk vs reward.

Did not sell the exact top of the move, but no one really ever knows how high these things will go. The best way to play these is to scale out into strength. Often these small caps will have bigs drops after such a big move upwards.  My first target was a pop through $2, as whole numbers can often act as resistance with stocks. The stock than had a volatility halt for 5 minutes (see here for a description of what these are), and then a sold the rest on pop into the $2.30’s, near the daily resistance levels.

Day Trading Tips and Lessons from The Trade

1. Use Moving Averages to Control Risk

Moving averages are great indicators for basing your risk on for day trades. It also shows you when a stock is getting extended and needs to pull back and consolidate before continuing trend. Once stocks pull into their MA’s, you can get low-risk entries with great risk vs reward. When playing moving average pullbacks, make sure to wait for some confirmation that the stock is HOLDING the moving average. Many traders make the mistake of buying the stock as soon as it gets close to the moving average, and it dumps right through it.

2. Scale-out into Strength

Small-cap stocks are volatile, and they don’t go straight up or down. A great way to take some profits, but still leave yourself in a position to capitalize on a bigger move is a trick called scaling. I talked about it above, but what scaling is selling a portion of your position when you have a profit. In my trade, I sold 3/5 of my position on the pop through $2, and then sold the other 2/5 in the $2.

3. Don’t Marry the Stock

99.9999% of penny stocks are a piece of shit company. Investing in penny stocks is basically just giving away your money to short-sellers. But there are plenty of short-term trading opportunities to capitalize on. Many novice traders make the mistake of holding onto a penny stock with the hope it turns out to be the next Amazon. It won’t be. By the dip, sell the rip, and move on.

4. Have a Trading Plan

Small-cap stocks with this much volume and trend move FAST. You have to pre-plan your trade before you take it. I guarantee that if you trade this without a plan you will either panic out on the first dip, or you will freeze and not cut the loss where you are supposed to.

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