This is one of the most important concepts for you to learn … It’s one of the big things that makes stock prices rise and fall.
What drives volatility? What makes a stock jump 336% or more in a single day?
Stock float.
Just think of stock float as the supply side of trading’s supply-demand equation. Or … the number of freely traded shares of a particular stock.
Since trading is largely based on supply and demand, the stock float matters.
The fewer shares that are available, the smaller the stock float — i.e., supply. The smaller the stock float, the more in demand the stock can potentially become.
When a company goes public, its board authorizes the creation of a certain number of shares.
This is the maximum number of shares a company can legally offer. Management needs to get shareholder approval to increase the number of shares.
Typically, a company issues fewer than the authorized number. That’s so they can raise more funds down the road without having to get shareholder approval.
For stock float, calculate the outstanding shares minus restricted shares minus closely held shares.
Closely held shares are shares owned by major long-term investors and insiders. These shares don’t usually change hands.
Why should you care?
Stock float is one of the most important things I look at in a trade.
Low Float, Big Gains: 7 Steps to Be a Successful Trader
I like stocks with a lower float because they can make more powerful moves. They can create great opportunities to ride some upward momentum.
But the volatility can be scary for some new traders. Especially if the stock is choppy — with huge uptrends followed by big downside moves.
But they work great for me since I usually underestimate stocks and sell way too soon. I go for singles, not home runs.
That’s just my style of trading. I cut my losses quickly and protect my profits.
Here are eight steps to help you trade low float stocks.
#1: Pay Attention to Stock Market Indicators
One of the key indicators I look for is high trading volume.
Trading volume is the number of shares traded during a session. When more shares get bought and sold, the trading volume is higher.
High volume means you can enter and exit your positions a lot easier. The last thing you want is to get stuck in a position because nobody’s buying or selling. It bites. You can lose big when you’re stuck in positions like that.
Trading volume is one of the most common indicators shown on stock charts. It’s usually on the bottom of the chart — you don’t need to change any settings on your charting software.
Sometimes traders pit stock float vs. volume in their trade setups. Ideally, I want both! I’d be wary of trading low-volume stocks. The float of a stock shouldn’t affect its volume.
But this next thing will…
A powerful news catalyst is another key indicator I look for. News can not only create a spike in trading volume, but it can also lead to powerful price moves. So keep an eye on the news.
You should know why a stock is making big moves. With low float stocks, pressure on demand can translate into big price movements. If you can’t find a reason, beware.
It could be some kind of marketing campaign without any legs. You can trade pumps, but you have to be able to recognize them first.
#2: Get to Know Key Stock Patterns
Patterns are called patterns for a reason. They repeat.
The beautiful thing is, the human mind is awesome at recognizing patterns. In the stock market, certain patterns happen again and again — and you can learn them.
I teach a lot of patterns to my students. My favorites include supernovas, morning panic dip buys, breakouts, and weekend trade setups.
This step is an important one. It’s easy for me to rattle off a few patterns. But it’s up to you to go do your homework.
Once you understand a pattern, see if you can identify it with stocks on your watchlist.
#3: Develop a Low-Float Stock Strategy
It’s important that you set yourself up with a trading plan for every trade.
You want to know your entry and exit points, the catalyst moving the stock, and the pattern it’s following. These should all be part of your plan.
Part of my plan is to concentrate on low float stocks. This way, I know that these other factors can affect the stock’s price.
Here’s a hint that will help you learn from mistakes and wins alike … You should always write down your strategy before you enter a trade.
If you’re just starting out, create the habit now. Document your trades before you trade for real. Keeping a trading journal can be an invaluable tool.
Preparation is key. I can’t emphasize this enough.
And I want to be clear about this: I don’t trade on gut feelings or message board tips. I use the same indicators, patterns, and proven strategies I’ve used for over 20 years.
Just knowing about float shares and patterns is not a strategy. Your strategy is the entire plan — start to finish — for each individual trade.
#4: Use Technical Analysis
Technical analysis is my go-to when it comes to trading low-float stocks. This is where you use certain indicators on stock charts to determine whether the setup is right.
I don’t want you to overcomplicate this. There are a lot of bad, overcomplicated indicators out there that I never use. Seriously!
I like to keep it simple.
News can be a powerful indicator. I like to buy stocks with good news — when they’re breaking out to new highs. Sometimes I short pumps on their first red day … or when bad news catches up to them.
(But I rarely short in this hot market and I don’t recommend shorting for new traders.)
And I use technical indicators like recent support or resistance levels. Maybe I’ll look at moving average or VWAP for a swing trade.
And then there are morning spikes and gaps.
It’s not that the more complex technical indicators aren’t valid. But they don’t serve the kind of trading I do.
#5: Use Fundamental Analysis
I don’t use fundamental analysis as much as technical analysis … Still, you should understand it and make it part of your arsenal.
Fundamental analysis looks at the company’s value, like its balance sheet, projected revenue, and management style.
Company fundamentals can affect the stock price. They can also give you food for thought when it comes to trading.
You might see something that indicates a run has legs. Or you might see why a run won’t last and prepare to potentially play the crash and burn.
#6: Develop a Watchlist
A stock watchlist is essential for trading. You won’t make a play on every stock you watch — more like one out of every five or 10. Maybe even one out of 20.
This is a good thing. There’s a reason that overtrading is a thing and “under-trading” isn’t.
For a lot of people, trading can feel like gambling. Trust me — I know. That’s why I travel so much. Otherwise, I’d be trading all the time.
The thing is, the more you prepare, the less you set yourself up for trading on impulse. Your watchlist is an essential part of your preparation.
#7: Never Stop Learning
You might realize by now that there are some foundational principles by which I live. And I recommend them to all my students and every reader in Tim Sykes Daily.
This one is the most important.
There’s always something to learn to be a better trader. I still study every day. This is such a crucial concept. If you follow me regularly, you know I talk about this. A LOT.
If you look at the top people in any field, you’ll see it’s the same — they all keep learning, practicing, and improving.
Constantly.
If you want to boost your chances of succeeding at this, you have to keep learning … It’s not even an option.
Every one of my successful millionaire students has that same attitude. None of them shows up and says, “I know it all.”
No. They show up every day and ask, “What can I learn today that will help me for the rest of my life?”
Think about that.
Understanding stock float is an important part of your trading education.
Hopefully, this has given you another piece of the puzzle that traders have to solve every day. This is the big question: what makes a good trade?
It’s important to recognize when something causes demand for a stock. That’s why traders scan for things like the biggest percent gainers. But demand is only half of the equation.
The other half is supply, and that’s what the float determines. When the float is low and the volume is high, big price swings become possible.
That’s why low float stocks rock. And when you know how to ride their charts, you’ll love them too.
Do you like to trade low float stocks? Do you ever trade stocks with high floats? Let me know why or why not at SykesDaily@BanyanHill.com!
Cheers,
Tim Sykes
Editor, Tim Sykes Daily
