August 4, 2021

Small cap day trading strategies

Top tips for a profitable small cap day trading strategies

Regardless of your level of experience as a day trader, there are a lot of financial instruments or securities you can trade you may decide to dabble into commodities, bonds, options, equities, index, currencies, or stocks. All or any of these will make you decent money if you take time to learn how the individual assets work and develop a realistic plan and stick to it.

Among all the assets available for day traders to trade, stocks often resonate with most traders and that explains why stocks day trading is causing so much buzz worldwide. While day trading offers an opportunity and a shot at becoming financially independent, trading can also gulp all of your capital if you don’t play by the rules.

As a day trader who is just getting into the field of play, it’s always best to identify and decide what equity suits your trading style, your risk appetite, and of course, the kind of stocks trader you are looking to become as you progress on your trading career.

Having mentioned “kind or type of stock traders”, you have probably been wondering and asking yourself; what types of stock traders are there? To not bore you with so many words, stock traders are generally classified into four groups.

The first category is those who deal with small caps stocks. The second category is those who specialize in mid-cap-sized companies and the third group are those that deal on large caps. The last group consists mainly of the “top dogs”, big shots, or expert traders. The last group is those who deal on all three small caps, mid-cap, and large-cap companies.

Even though the mid-cap and large-cap companies’ stock traders are widely recognized, the spotlight is mostly beamed on the small cap stock day traders. And this brings us to the primary focus of this piece small cap day trading strategies.

What is a small-cap trading strategy?

It’s almost impossible to discuss a small cap trading strategy without touching on small cap stocks. Small cap stocks are best described as stocks of small companies that have a market capitalization of less than a billion dollars. On the other hand, the mid-cap and large-cap companies’ market capitalization are in the range of between one billion dollars and five billion dollars for the former while the latter boasts of market capitalization that’s worth more than ten billion dollars.

Hopefully, that paints a clearer picture of what small caps companies are. Having said that, we can shift our focus to small cap day trading strategies; but in this case, small cap stock trading strategies.

What are small cap trading strategies?

To fully grasp what small cap day trading strategies entails, you must make time to research and understand what small cap companies are. Small cap companies are usually mid and large companies that lost their foothold and suffered a decline or dip in stock value. It’s because of this particular reason that most investors, especially fledglings who are just coming into the stock market drag their feet. Most times prospective investors are first met by how caps are surrounded with so many uncertainties that trend to make them risky.

The singular fact that a good number of small cap companies are once is what most new investors hold unto and pass on small caps. They can’t get their mind of the thought or idea that a company fell from its billion dollars status to the millions in market capitalization. And thinking about the reasons why these large companies fall to small caps doesn’t help. Some of the reasons why companies lose market capitalization often include poor management, increased competition, weak cash flow, and lack of inventor trust among other reasons.

With all of these, you are probably thinking small cap companies and stocks is a no-no! If you are nurturing or nursing such thoughts, you should have a rethink because small caps companies also present a plethora of profitable trading opportunities. With the right small cap investing strategies or small cap day trading strategies, there is no limit to how much you can make in profits.

How to develop a profitable small cap strategy

As the famous saying goes, one must learn to rules to bend them. In this instance, you must make time to understand how small cap stocks day trading strategies work to maneuver the markets. While developing your small cap strategy, the first place to start is to study the markets market scanning.

Market scanning involves scouting the markets and identifying small cap stocks and assessing their performance. While scanning the market for viable small cap stocks may not be a walk in the park, the long-term advantages are worth the sweat. If you get your market scanning right, you would have succeeded in fishing out companies that are full proof and will churn out appreciable ROI.

While you are at it, it’s always best to keep tabs on at least three companies. That way you have a variety to choose from and you won’t have to wait for one stock all day before you participate in the stock market.

Always leverage technical analysis on your small-cap strategy

Implementing a profitable small cap strategy is dependent on your ability to leverage virtually every tool that is available to you and one of such tools is technical analysis. With the aid of technical analysis, you can forecast the trend of the stocks based on the company’s historic performance. One tip you should hold onto is to not hold on to small cap stocks for too long. Why? Compared to their large counterparts, small cap companies lack the intrinsic value to keep them afloat for long and they are quick to run into debt.

Other factors to consider while developing your small cap investing strategies include market liquidity, trading cost and slippages (either gap up or gap down). When a market is very “choppy”, it becomes much easier for your stop loss to be hit. As such, it’s always best to use wide initial stop loss instead of narrow ones. That way, you don’t have to lose sleep over your stop loss been hit.

What are the advantages of small cap investing strategies?

While the risks attached to small cap companies are more pronounced, they also present stock day traders with ample opportunities some of which include growth potential (an opportunity to buy stocks early before they appreciate). A well-executed small cap strategy will give individual day traders a head start and an edge over their big mutual funds because the Securities and Exchange Commission (SEC) regulations controls the influence of mutual funds on small caps.

Last but not least, small cap stocks tend to outperform their S&P 500 counterparts in the long run. This claim has been proven by the Fama and French three-factor model. Suppose you are learning about the Fama for the first time, Fama is a Nobel Prize winner courtesy of his landmark exploits on efficient markets.

The idea is that small cap value stocks are often under the radar of top analysts and are mostly free from Wall Street influence. This makes them keep them away from the prying eyes of big investors and offers an opportunity to rake in high returns.