Penny stocks are a great way to have fun with trading, but if you are serious about making money in what can be a highly lucrative occupation then you need to get the right tools for the job.
Stock scanners are an essential item for any penny stocks trader who is looking to take their trading to the next level and in this article, we’re looking at why you absolutely must have a stock scanner.
What are stock scanners?
Stock scanners are software that allows the user to collect, collate and analyse data on stocks and markets with incredible speed.
In some cases, they also allow integrated links with brokers that not only reduce the cost of buying but also action orders very quickly and both of these are very useful for any penny stock trader.
The best scanners are software that is installed on a computer old style. This is because a well-configured PC with a fast broadband connection will easily outperform a browser-based Saas alternative.
Some are free, but as with all things in life you very much get what you pay for so buying a subscription to a fast and reliable scanner is far preferable to using the cheap option, especially if you are serious about your trading.
So let’s look specifically at what stock scanners bring to the table for penny stocks traders.
Identifying targets
The starting point for any trader has to be identifying potential targets.
Most markets have many thousands of companies listed which makes choosing a few likely candidates very difficult indeed.
Traders all have their likes and dislikes when it comes to stocks and so a scanner allows the user to plug in a series of different criteria that either cause the software to reject or highlight the stock.
For example, imagine that a trader that only likes to buy stocks that have high volume, good p/e ratio and a low debt/equity ratio. The stock scanner would quickly assess all of the stocks on a particular market and then filter out any that don’t meet the requirements.
Traders can also leave a criteria search live, meaning that when a company drops into the frame in the future, they are instantly added to a watchlist.
Collating research
Once the trader has a list of potential targets then they need to do their research.
Depending upon their style this may be a fundamental analysis, a technical analysis or a sentiment analysis.
The stock scanner is able to pull in many different types of information that feed into the system and allows the trader to see a full picture of the stock and its potential.
For technical traders, the scanner will present charts showing the stock movement based on any number of different analysis methods.
And for the market sentiment trader, good scanners can bring in mentions of the stock on social media and across other traditional media outlets.
Simple purchasing (and cheap)
A connected stock scanner will identify a series of stocks for the trader to research and make that research easier and less time-consuming but all that is for nought if they have to then log on to another system to make their trades.
A good stock scanner will have broker integration, allowing the trader to quickly put in a buy order directly to their broker.
Often the better scanners will have arrangements with brokers that reduce the cost of trading too, making it much easier to buy low-value penny stocks.
Liquidity is important for penny stocks
Let’s be clear here – we’re talking about traders and not investors.
A penny stock investor will buy stocks for the medium term, hoping to luck out and find a potential unicorn whilst a trader will buy and sell stocks many times a day looking to benefit from short term volatility.
But there’s a problem here; penny stocks are often not traded on the main markets or if they are, will have a low volume of sales.
This means that for the active trader who wants to buy and sell quickly, there may not be a ready market.
So it is all well and good buying a stock and seeing the price rise, but if they can’t sell it and crystallize a profit, then it is just a paper increase.
A stock scanner will be able to tell the trader the volume of trades in a particular stock over a period of time and this shows them that when they have made their money they will be able to cash out before the market turns again.
Removing bias
The research shows that humans are really bad at spotting bias and this can be a real problem when trading in stocks.
Put simply, people think they are better than they are, they tend to favour certain stocks for no reason, and they tend to hold on to them for too long.
Having an impartial system that only shows stocks that conform to specific and measurable metrics is a really good way to remove bias when considering a buy.
Getting out at the right time
So much of the talk around stock scanners is about buying stocks and granted, they are incredibly useful for this but it doesn’t end there.
Any smart trader will know that buying at the right time is only half the battle, selling at the right time is just as important.
In the same way that a stock scanner can show when a stock is a good option to buy, it can also show when the opposite is the case.
Highlighting when a stock in their portfolio has outlived its usefulness allows the trader to close their position, realise their profit and move on to the next prospect.
Wrapping up
Traders that want to remove the hassle of finding targets and then researching their background can do no better than invest in a good stock scanner.
The inbuilt analysis features and integration with brokers means that they speed up the process of choosing, researching and buying penny stocks.
For any trader, the speed, analysis capabilities and efficiency of a stock scanner is a real game changer.
