Penny Stocks and Forex: Similarities and DifferencesBringing together the two distinct worlds of penny stocks and forex trading requires a comprehensive understanding of the unique characteristics of each of these investment opportunities. The article discusses how the speculative nature of penny stocks compares to foreign exchange trading, helping traders gain a better understanding of the opportunities and challenges of the two markets.
Understanding Penny Stocks
While looking for the best penny stocks to purchase, traders approach this segment with a balanced perspective and conduct thorough research.
What Are Penny Stocks?
Penny stocks are shares of small-cap companies trading at a low price, typically below $5 per share. They distinguish themselves from larger stocks by their market capitalisation, which is usually below $250 or $300 million. The top gaining penny stocks today are typically found in industries characterised by small, emerging enterprises, such as technology, biotechnology, renewable energy, mining, and pharmaceuticals, where companies seek capital investment to fund early-stage development and growth initiatives. Penny stocks are often associated with the term "Pink Sheets'', which originated from the practice of displaying price quotes for stocks traded over-the-counter on pink-coloured sheets of paper.
Where Are Penny Stocks Traded?
The top trading penny stocks can be found in the over-the-counter (OTC) market, which serves as a decentralised space where securities are traded directly by a network of dealers. It’s unlikely you will find them on large stock exchanges; however, there are exceptions.
As companies traded in the OTC market are subject to less strict reporting requirements, it’s vital to be careful when choosing a platform for penny stock trading and investing.
The requirements for filing financial information to regulatory authorities play a crucial role in choosing a trading platform. Marketplaces such as OTCQX, within the OTC Market Group, attract companies committed to transparency and stringent disclosure standards. In contrast, the Pink market attracts some of the best penny stocks for day trading, being a more speculative and loosely regulated tier and allowing securities to trade while complying with few financial standards.
Major Driving Factors and Risks
Penny stocks are notably influenced by speculation, with their prices being highly sensitive to perceived opportunities for quick and substantial returns. Associated with small, less-established companies, for which financial data is often scarce, penny stock prices may surge unexpectedly on news about the company's progress, such as product launches, partnerships, and financial results. However, this news is frequently manipulative and part of so-called 'pump and dump' schemes, where prices are artificially inflated and shares experience enormous price fluctuations.
Another significant consideration in penny stock trading is dilution. The number of outstanding shares may escalate due to mechanisms like employee stock options, share issuance for capital raising, and stock splits. When a company issues shares to secure capital, a common necessity for small enterprises, it often leads to a dilution of ownership percentages held by existing investors, which exerts downward pressure on the share price.
How Do Penny Stocks Compare to Forex?
Below, we discuss various aspects in which penny stocks and forex trading can be compared to each other, helping traders find out whether penny stocks may be recommended for their trading profile.
Risk Level
Penny stocks present unique risk factors. These include high volatility, limited liquidity, the potential for fraudulent activities, and a lack of comprehensive information. A thorough examination of these risks is essential for investors trying to capitalise on price fluctuations of some of the most volatile penny stocks. Forex trading, on the other hand, comes with its own set of risks, including currency fluctuations, geopolitical events, and the leverage-induced amplification of losses.
Potential Returns
Penny stocks may have huge potential and deliver potential returns due to their low share price if the market moves favourably. However, this is not always the case; a low price doesn’t guarantee a future surge. The higher potential returns come with increased risk, and investors must carefully analyse each individual asset, especially in regard to the lack of historical performance data for some emerging stocks. Forex trading also offers the potential for benefiting through currency value fluctuations. Leverage in forex can amplify returns, but it also magnifies losses.
Liquidity
Penny stocks often face challenges related to liquidity, as their lower market capitalisation can result in fewer buyers and sellers. Forex markets, on the other hand, are known for their high liquidity, given the vast number of participants involved, including major financial institutions and central banks. Contrasting liquidity in penny stocks with forex emphasises the different trading environments and potential impact on trade execution when defining the best way to trade penny stocks.
Accessibility and Learning Curve
Penny stocks are considered accessible for traders and investors with any level of experience due to their low share prices and the lower level of initial investment that their trading requires. However, investors need to get familiar with the challenges associated with investing in smaller, potentially volatile companies. Forex trading, with its complex currency pairs and market intricacies, has a steeper learning curve. Novice traders entering the forex market need to invest more time in understanding the currency movements, economic indicators, and geopolitical factors influencing exchange rates.
If you want to compare penny stocks and currency pairs, you can visit FXOpen’s free trading platform, TickTrader.
Are Penny Stocks a Good Option?
While the desire to find the best penny stocks to buy today may be the driving force behind many one-time trading decisions, trading penny stock CFDs may offer better opportunities. CFD trading allows you to take advantage of the rise and fall of a stock price and use effective risk management tools, including stop-loss orders.
Diversifying a Portfolio: Diversification helps spread risk and can contribute to a more resilient strategy, especially when different markets may respond differently to economic events.
Capitalising on Stock-Specific Events: Forex traders can leverage their existing skills in analysing global events and apply them to individual stocks, taking advantage of price movements triggered by earnings reports, product launches, or other company-specific developments.
Exploiting Correlations: Identifying positive correlations between certain currencies and penny stocks from specific sectors or industries can potentially amplify returns during favourable market conditions. Negative correlations can help hedge risks.
Conclusion
While forex and penny stock markets share commonalities in terms of the potential for high returns and the necessity for risk management, they diverge significantly in their market structures, liquidity, and regulation. Traders must weigh all the relevant factors to navigate these distinct markets effectively. Looking for trading opportunities? You can open an FXOpen account and apply your trading strategies to over 600 markets.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
DTIL trade ideas
Precision BioSciences, IncOn the above bi-Weekly chart price action has corrected over 90% since a sell signal in November 2020 @ $13 (not shown). A number of reasons now exist to be bullish , including:
1) A strong buy signal prints (not shown).
2) Regular bullish divergence . Multiple oscillators printing positive divergence with price action over an unspecified period.
3) 2-week Dragonfly DOJI candle.
Is it possible price action falls further? Sure.
Is it probable? No.
Ww
Type: trade
Risk: <=6% of portfolio
Timeframe: Don’t know.
Return: Don’t know
Stop loss: <= 90 cents
DtILIdk about you guys but I have been looking at this stock for A very long time. I’ve played the swings on it a few times. Last breakout months back I got at 11$ On a Friday and on Monday it was at 18$ premarket as it broke from a massive pattern. We did fall back into that pattern again shortly after news came out. However we did something incredible. I don’t have the pattern drawn out, look into it if you’d like. We broke back out of this pattern and came back with a perfect falling wedge/ bullflag to touch closely to the .618 FIb…. We broke out of that bull flag as well as bounced off that pattern breakout. This uptrend Has been strong, retesting each fib retracement double bottoming on each. Do your own TA and research but this is looking gorgeous
DTIL localized .618DTIL from an elliott wave perspective has completed wave 2. Consolidation here would be good for an enentual wave 3. The projected zones are optimistic and it could easily take longer for the stock to move that far upward. I expect resistance around each target point which could cause consolidation, but hopefully from a long standpoint the stock could hit ATH by end of summer.
TIGHT STOP LOSS. I am not going to play with this one if it drags below the .618. The upside becomes super shaky and it could plummet if it loses the support.
DTIL precision biosciences 2021I typically post about what I'm actively trading, so I don't know how I forgot to mention this little gem. Precision biosciences is in the gene editing space with a relatively small market cap compared to others in the space (e.g. CRSPR). The company outlook is great in my opinion. It's one of my core stock picks for the year and largest holdings. My first entry was near the bottom of the December pullback in the $7 range, and it's treated me very well ever since. If it pulls back harder and drops down below uptrend support, I'll just keep accumulating more. Both buy zones and sell targets are on the chart. Sell targets are a bit fuzzy. My expectation is that they'll all pick up within a year, but I'm prepared to wait two or more years depending on conditions of the entire market. If things develop well, I might actually consider investing long term and just holding shares indefinitely. Keep this one on your radar. I'm a buyer on a pullback to any of those anchor zones (cyan boxes). Let's see what happens!
Critical level for Precision BiosciencesIf we break the current support, likely down leg to lower upward trend. I will likely bow out and re-buy at the lower level. If we break above current support, will likely add to my holdings as I have done previously at this level.
This is a speculative trade based on potential future benefit, so do what you will with it.
DTIL setup for long term growthThis is one of those companies where the fundamentals match the chart. This company is bringing gene editing to cancer and biodevelopment. The leading diagonal is super promising to have a strong first wave that would finish at ATH. After the Fib correction this could fly outside the pitchfork and really show longterm growth. Price targets on the next two waves are given as well as an estimate pathway to break out of the diagonal
Precision Biosciences pushes through resistance Not much to say here other than bio stocks are the place to be. Historically there is plenty of headroom on this stock. I bought in around $9 and yes I wish I bought more. ATH is $23.60 - although very very briefly. In the meantime, I need to figure out some better charting for this one.
Wait for the test and continuation up on this one. It has been such a long time since this stock has put in solid gains there are plenty of folks looking to take their profits. Otherwise, Bio will be king this spring and this stock is ready to keep going up.
Note that we are way over-extended on the market. Be ready to take profits or cut losses. Your risk is your own.
Precision Biosciences recovers into resistancePrecision Biosciences (and Crispr as well) both recovered into an area of resistance - but have not yet proved they are back on track.
I am long on both and if we strike further down will be accumulating. FWIW, I am looking at both being very strong in the spring - but at this point there is high risk.
DTIL Morning Mover Alert UpdateExpecting a 15-17% Swing on DTIL as the stock rounds off from it's previous $12.50 Breakout Consolidation. It seems as though profit-taking has completed and the stock is moving higher in the pre-market session to solidify the swing trade. We have been watching the stock for the past few days and the Buying Volume has spiked over the course of that time period. In regards to what could push this stock even higher, the company just announcing receiving positive interim results from it's PBCAR0191 Trial as Potential Lymphoma and Leukemia Treatment. The company also has completed preclinical work for another related drug candidate: PBCAR19B, and expects it to enter the clinical trial in 2021.
DTIL - Flying under the radar towards 33% gains in 10 weeks?DTIL has been gaining of late inside of the small BLUE rising channel. As unassuming as it may look, this 3 month uptrend has already broken through a couple nasty resistance lines: the upper boundary of the RED falling channel, and the horizontal resistance of the BLACK rising triangle. If DTIL can trade above the 200 dma (4% above current price), then it could fulfill the ascending triangle's target at 11.35, some 33% gain from today's price, in as little as ten weeks.
This BLUE rising channel could bring DTIL back to its all-time highs in less tah ten months, for an excellent 130% gain, but the chances that price will stay inside this channel for so long are almost zero. Early stage biotech companies are extremely volatile; they can explode higher or crash down at any time, regardless of existing trends. So trade them very carefully, and take all price projections with TEN grains of salt.
Full disclosure: I own DTIL at 0.9% of total assets, the absolute maximum that I will invest in such a volatile biotech stock. They have a great pipeline of non-invasive, immunotherapy based potential cancer treatments, and some exceptionally bright minds developing them.