Short-term trading in penny stocks can be an effective method of making money provided you keep your cool and follow a few simple guidelines. In this context, short-term trading means the ability to cash in on price fluctuations on a short-term basis. Many of the shares may not make significant short-term fluctuations and you need to have a whole portfolio of penny stocks that you follow. This way, you maximize the chances of finding stocks that move on the short-term leases
The stocks in your portfolio will need to have a minimum level of daily trading activity (at least 50,000 shares per day on an average) and a high beta factor to indicate high volatility. Not that trading activity in penny stocks may be sporadic so you will need to consider average trading volumes over a longish time frame. Sometimes trading in active stocks can dry up overnight and you need to be in a position to trade before this happens.
If you plan to get involved in short-term trading, make sure that you can commit the time that is necessary to follow a portfolio of target stocks on a daily basis. You also need to develop the proper trading attitude and the state of mind that is required to follow through. You also need to commit yourself to a minimum investment of say $5,000. Only then will you be able to trade in penny stocks for the short term or a profitable and consistent basis.
You will also need a fast Internet connection and a dedicated computer to be able to get quotations reliably and accurately at any point of time that you wish. You will need to check prices many times every day to keep track of price fluctuations and this is best done over the Internet. An Internet connection to your broker will also help you to place orders for trading quickly and in a timely fashion.
You need to stay right on top of your buy and sell orders as well as the market action so that a particular penny stock movement does not come as an unexpected surprise. The most effective way to be profitable is to take a profit in small increments because you are more likely to see multiple movements of 10% in the price than 50%. Paradoxically, if you are seeing profits consistently in the 50% range, you are not trading at the right frequency and your chances of losses are bound to increase.
You will be trading more frequently than a value investor and commissions will form an important part of your costs. If you are not already using a discount broker with rock bottom commissions or if you pay too much per trade, you will find your trading profits being eroded substantially by your transaction costs. This is further exacerbated by the fact that your buy or sell orders may only be partly fulfilled and your commissions are therefore being paid out on smaller trading lots. Try and rework your target prices and adjust the quantity of each order rather than place multiple orders and multiple commissions.