My Rules For Trading Small Cap Stocks
It's important to have a set of rules that you trade by. That doesn't mean that you follow them each and every time, because no stock and no trade is the same. As a result, some flexibility is required, but overall, you should have good set of rules when trading small cap stocks (or any type of stock for that matter). If you are new to trading, it is better that you adhere to rules every time no matter what.
So what I've done with this post, is provide you with the trading rules that I try to abide by each and every day. While they aren't written in stone, they are my guide in helping me to make wise decisions with my trades, whether it be the entry, the management of the trade, or the exit. I trust these rules, so I'm not constantly looking for reasons to justify not adhering to them.
1) I trade stocks on the breakout
Breakout to recent/new highs
Breakout of resistance
Breakout of a bull flag/wedge
Breakout that confirmed a double bottom, cup-and-handle, inverse head and shoulders, or other related price pattern.
2) Avoid jumping in plays when the market moving down unless volume is remarkably strong in the trade setup and bucking the overall market trend.
3) If at all possible avoid the first 5-10 minutes of the trading session for trading small-cap breakout plays.
High amount of head fakes during this time.
Large spread in bid-ask - risk getting a very, very bad fill using a stop order.
Exception would be unless the trade is a high-probability trade, (i.e. very strong setup with huge volume pouring in (and in previous days) and favorable price action of late)
4) Guidelines for holding a stock overnight
All stocks are day-trades until there is a legitimate reason to hold a particular trade overnight - its got to earn that privilege.
Positive Volume Buzz, preferably over 100%
Meets the volume requirements and holding the breakout level favorably.
Volume surge at end of day with good price action with it.
Bucking market weakness.
Here are rules #5-8.