Is their liquidity risk in your market?
Before you take a buy signal on a penny stock or stock options, you must make
sure the bid/ask spread is tight enough to justify the trade.
Traders that buy
illiquid OTC stocks, “pink sheet” stocks, or penny stocks (whatever you want to
call them) can lose money instantly when getting in them if they are low volume,
and you buy at the ask price and the bid is lower. Also,
you can try to sell them
only to find that there are no buyers. This forces you to wait and take a lower
price than the bid while they try to find a buyer to purchase your penny stock.
My advice is to avoid penny stocks due to the liquidity risk. Even stock options
on major stocks can have slippage on out-of-the-money options due to a lack of
liquidity at that price. A $1 gap between the bid/ask
spread on an option contract
will cost you $100 to get in, and then $100 to get back out. The farther options
go away from at-the-money strike prices, the wider
the spread gets as liquidity
dries up. Only trade options in the front month and close to at-the-money in
major stocks to avoid the large losses in the bid/ask spread.
How much screen time do you need to execute your trades?
Your type of trade signals will dictate how much time you spend in front of the
computer each day. There are many trend following systems that only require
you to take your signals at the market open or at the end of the day. There are
also trend following strategies with trade signals and
portfolio changes that only
happen at the end of the week, or even the end of the month.
Many stock investment portfolios only make moves to redistribute their portfolio
allocations once a quarter. Warren Buffet may hold a stock for decades. On the
other hand, a day trader may need to look at the quote
screen all day waiting for
his signal. Other day traders may only trade the first and last hour of the markets.
Swing traders and position traders may trade once every few days or weeks.
Some futures traders’ trade over night as their market is open.
The important thing is to create signals that you are able to take with your
current life commitments. Few people can day trade or focus closely enough on
the open and close due to other commitments on their time. Find the right screen
time that allows you take your singles, or use
automatic buy stops and stop
losses if needed.
