Trading Windows Provide Quick Profits

Quick Profits Can Be Generated from Trading Windows

Woman Drawing Trading Chart
Rouzes/Getty Images

With penny stocks, their most significant price moves occur over very short time frames.  Shares tend to move rather quickly over days or weeks, while they are less volatile over the prior and subsequent months.  These major price moves (over short time periods) are known as Trading Windows.

Picture a penny stock trading at a flat price for a year, only to triple in value within three hours!  That increase in the investment represents a Trading Window.

 Such sudden, dramatic moves are common in speculative shares.

A general rule is that 80% of the price moves in a penny stock occur over less than 20% of the total trading time.  Many lower-priced, volatile investments will trade within a tight range (for example, bouncing between $2.00 and $2.40 per share) for months on end, then make a sudden major move over the course of a few days.

The great news is that investors can increase their odds of identifying these Trading Windows.  They put their investment dollars to work when they expect significant events which may move the stock price.

Remember, the concept of Trading Windows also applies to shares which may crash lower, so getting your calls right is very important.  Benefiting involves timing by knowing which price drivers may be approaching.  In fact, no discussion of trading windows is complete without also reviewing our article on price drivers.

By identifying a potential situation which may impact share prices, an investor may be able to position themselves in the penny stock ahead of time, and subsequently reap the benefit of the announcement.  

However, if the upcoming event is widely known, be cautious to avoid getting caught in a, "buy the rumour, sell the fact," trap.

  When everybody knows about a major event, and they are all buying, once the "fact" is actually realized, the shares often drop.  This concept is explained fully on page 14 of "Pennies to Fortunes."

Potential price drivers which could result in a trading window include, but are not limited to:

Financial Results

Companies typically release their annual and quarterly financial results on a set schedule.  Often the numbers are surprisingly strong, which results in the shares spiking into a new, higher range.

Mergers and Takeovers (Friendly or Hostile)

Often a larger company will pay a price premium to the penny stock's shares, to entice investors to sell.  For example, the acquiring company may offer $2.40 for shares which only a day earlier were trading at $2.10.  This price premium often is great enough to entice current shareholders to sell, subsequently giving the buying corporation enough of the outstanding stock to absorb the smaller business into their operations.

Some companies and industries are more likely candidates for being acquired by larger corporations.  For example, a tiny company with a great technology, land claim, or patents which a bigger business would like to own, or perhaps a business with more cash on the books than their current value.

Watershed Events

Many game-changing events can be predicted.  For example, biotech companies go through a standard process to bring their drug or medical technology through the phases of the approval process.  Any Phase III drug candidate may have major news to release at any point about the success of their late-stage trial, which often spikes shares.  (If the results are poor, the shares could collapse).

Other events, such as a Food and Drug Administration (FDA) approval, a major government contract, or changes in Federal rules and regulations can be anticipated.  At very least, investors can position themselves just in case of a positive news release or announcement.

Media Appearances

While less important for larger-scale companies, penny stocks can often be discovered, or enjoy a pop in their price, when they land a significant mention in mainstream media.

  Usually, their media outreach is no secret, and they will tout the future appearance ahead of time.  For the skeptics among us, most shows will be able to provide their schedule of upcoming guests for additional confirmation.

Press Releases (PRs)

Usually, a company's press releases will have little impact.  However, just by taking a look at a penny stock's history of releases (available through their Investor Relations page on their website), you can see how often they send out a PR, and what effect it typically has upon the share price.

Industry Sympathy

Stocks tend to trade in sympathy with the overall industry.  A rising tide lifts all boats, even the rotting ones.  

So, when all other companies in a single industry are increasing in price, you can assume that the penny stock you are watching will eventually follow suit, if it hasn't already.  Of course, the specific company can always have unique circumstances which takes it in the opposite direction of their peers, but that rarely happens.

Trading Volume Spikes

Often the trading volume in penny stocks will spike immediately before the share price moves higher.  For any number of reasons the attention of investors has been attracted, and with increased buying interest, the underlying share price almost always increases.

As with any aspect of investing, you will run the risk of being wrong, which often results in losses (or at least a lack of gains).  However, like playing poker where you invest more on higher calibre hands, you can benefit from Trading Windows by positioning yourself in shares around the times of higher probability positive events.