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How to use the Stock Scanners for Day Trading

This is the scanner I use to find most of the stocks I trade. I'm focusing on the top 3-5 leading percentage gainers each day and then choosing which one most closely meets my criteria for being a stock worth trading. In this article, I'll outline my criteria, but first I want to ensure you understand each of the columns on the scanner.

Symbol: The symbol column is the stock ticker for the company. You can click on the stock ticker to learn details of the company including breaking news.

Gap (%): The scanner is sorted by the biggest percentage gap from highest to lowest. A gap is defined by a stock opening higher at the 9:30am opening bell than the stock closed at the 4pm closing bell during the prior trading session. Stocks gap up because they have news. Once a stock opens at 9:30am the percentage gap becomes fixed and does not change for the rest of the day, however the change from the close will continue to change.

Price: This is the current price of the stock.

Volume: This is the number of shares traded today. More volume means it will be an easier stock to buy.

Relative Volume (5 min %): This is the amount of volume in the last 5 minutes relative to what is average. A higher ratio indicates the stock is trending and gaining popularity.

Change From Close (%): This is the percentage change from the prior day close.

Float: The float is defined as the number of shares available to trade.

Short Interest: This refers to the number of shares held short against the company. Higher short interest can create short squeezes.

Short Ratio: This is the ratio of shares short vs float. It's another way of looking at short interest. Higher numbers are better.

What are Penny Stocks?

The Securities Exchange Commission (SEC) defines penny stocks as any security trading under $5.00 per share. While most penny stocks trade on the OTC (Over-the-Counter) exchange, some trade on Nasdaq or New York Stock Exchange. In Figure 1 below you can see my personal profitability by price range stock. But here is something super important. None of these trades were on OTC stocks. I'll discuss the reason why in this article.

Most of these companies are relatively new, have a small market capitalization, and haven’t established a track record as successful businesses. This makes even the best penny stocks speculative investments for traders and investors.

As my verified trading profits show, there is a lot of opportunity for profit if you can do the following:

1. Manage your risk
2. Adopt a proven system and strategy that includes how to choose stocks to buy and where to buy and sell.
3. Be analytical and trade based on data, not your emotions. Do not allow greed to overpower your decision-making. Take your gains when you have them, rinse and repeat.

Oh, and in case I didn't mention it, my results are not typical. But that's probably why you're interested in learning more from me.

Figure 1

Penny Stocks on NYSE and NASDAQ Exchanges

Personally, I only trade penny stocks listed on Nasdaq, New York Stock Exchange, or the American Stock Exchange. However, most penny stocks do not trade on these large exchanges.

Most penny stocks trade on the OTC (Over-The-Counter) Markets. Companies trade who are unable, or unwilling to meet the strict financial and ownership reporting requirements of the larger exchanges will often become listed on the OTC Markets.

The first big loss I had, about $15,000, was trading an OTC stock. I fell straight into a classic pump-and-dump scheme.

Remember the movie Wolf of Wall Street with Jordan Belfort? In that movie, they were trading penny stocks that are called “Pink Sheets”. These are some of the worst publicly traded companies you could possibly trade, let alone invest in.

Be Aware of Penny Stock Pump & Dump Schemes

A pump and dump is an illegal scheme where an individual, or a group of individuals, secretly amass large positions in a stock then inflate the price of a stock with false or misleading statements in order to sell their shares at a profit. Here's an example of $194 million dollar pump and dump case the SEC brought against 15 individuals located in the Bahamas, the British Virgin Islands, Bulgaria, Canada, the Cayman Islands, Monaco, Spain, Turkey and the United Kingdom.

You might wonder how in this day and age this is even possible. Pink sheet companies are not required to make filings with the SEC. While some do file regularly, others do not. For those who choose not to make public filings, there is a true lack of information available to the general public when it comes to who owns the company and what the financials of the company look like.

Let me describe an example of how these schemes can work. The criminals incorporate a company in an offshore country like Panama or the Cayman Islands as a shell company. Even in those countries, the true identity of the owners can be disguised. The company then gets listed on the OTC Markets as a pink sheet stock and becomes publicly traded. At this point, the insiders launch a campaign of distributing false information about the stock.

Novice investors (like me when I was getting started), buy the shares believing in the news and the potential. With all the buyers the prices go up and there is enough volume for the insiders to begin selling their shares which they own at a cost basis of 0.00 for a massive profit. Since the US Market is accessible to foreigners, many of these schemes are operated by foreign nationals.

I encourage you to learn from my mistakes and steer clear of OTC Markets, especially pink sheet companies.

Do You Know the 4 different types of Penny Stocks?

Penny Stock Tiers

Tier 1: Priced over $1.00

These are the stocks that I like day trading. They are listed on a major exchange like the NYSE or NASDAQ and are usually priced just above $1.00 per share which means they aren't a technical penny stock but still meet the SEC definition of penny stocks since they are low priced. Tier 1 penny stocks are still speculative but less open to manipulation because the exchanges require them to provide financial information and are held to a higher standard than OTC penny stocks. These stocks can come out with news overnight that can result in a huge move.

Tier 2: .01 - .9999 cents

Traditional penny stocks, in my opinion, are stocks priced between 1 cent and 99 cents. They aren’t below 1 cent (if you didn’t already know, stocks can trade at fractions of a penny). It’s not uncommon to see a stock priced between 1 cent and 99 cents still listed on the NYSE or NASDAQ.

These companies will typically get a letter (which is made public), that they need to meet the listing requirements to have their stock above $1.00 within a certain amount of time. If they do it, the stock remains listed, if they can’t it will be de-listed and move to the OTC market exchange.

However, it’s important to note that stocks that trade above $1.00 will never have a spread of less than 1 penny per share. Notice in Figure 2 that the stock NAOV is trading $1.17 x 1.18. It has a 1-cent spread. That means for the stock to go from 1.00 to 2.00, it has to move up 100 increments. For the stock to go from 1.17 to 1.27 it only has to go up 10 pricing increments.  This means the stock can squeeze up 20-30% very quickly.

In a stock below $1.00 a share, stocks are quoted in the 1/100th of a penny. As shown in Figure 2, the stock BQ is trading at $.4714 x .4719. Because penny stocks trade in the 1/100th of a penny, it means for the stock to go up 10 cents it doesn't have to just go up 10 increments of 1 penny each. It has to go up 1,000 increments since each penny has 100 increments.

What this essentially means is that stocks above $1.00 a share will move significantly faster than stocks below $1.00 a share.

Figure 2

Tier 3: .001 - .009

Sub-penny stocks are stocks that are below 1 cent per share.  So that starts at .0099. These are typically not NYSE or NASDAQ stocks, so for that reason, I wouldn’t trade them. These aren’t particularly noteworthy beyond the fact that the companies aren’t strong enough to even have their stock priced at 1 penny per share.

Figure 3

Tier 4: .0001 - .0009

Trip Zero Stocks are priced .0001 – .0009. They're called “trip zero” because they are priced with 3 zeros. See Figure 4.

As you can imagine these stocks after often used as vehicles for manipulation. Each increment the stock moves up is a 100% move versus the entry price of .0001.

Many “hot stock” alerts are on sub-penny stocks or trip zero stocks and primarily benefit the people who first bought the stock or who own the company.

A Penny Stock Trading Strategy for Beginners

I learned about the stock market at a young age because my great-grandfather was working on the exchange on the day of the crash in 1929 and lost everything he'd made up to that point in his life. The experience scarred him and became a story of caution told in our family for generations to come. Between 1997 and 1999, I went to a school that taught a class dedicated to learning how to trade in the stock market. The Dot Com bubble was in full swing and even the teachers were interested in trading.

I opened my first trading account with TD Ameritrade during summer break one year while I was in high school. I bought stocks like CAT, IBM, and AAPL because I was familiar with the companies. But with a measly $1,000 trading account I made next to nothing. I want to say I made around $64 over the course of the summer. The problem was that I was buying the wrong type of stocks for account growth. I was buying Triple A Investment Grade companies. But to grow a small account, I needed to trade small speculative companies that could go up 100% in a matter of days or weeks.

When I started trading stocks again in my 20s after I'd graduated college, I took a different approach. I remembered my friend Ben, and I googled the “Best Penny Stocks to Buy”. I was inundated with a list of terrible companies promoted by questionable services. That's when I realized I'd need to develop my own strategy for finding stocks to trade and for buying and selling them.

To reduce my exposure to the obvious risks in the penny stock market, I've developed a strategy.

The strategy that I've adopted is simple to explain. Each day I use scanners, like the one above, to build a watch list of 2-3 stocks that I think have the potential to squeeze up 20-30%. Yes, the stocks are already extended, but I've found it's much easier to make money trading a stock that's already moving than by trying to predict which stock will start moving.

How To Find the Best Penny Stocks To Buy

The first step to trading stocks successfully is you must be in the stocks that have the highest probability of making a strong run. But how do we know which ones will be the big movers?

The hardest part is figuring out what you're looking for. Once you know the criteria for a stock to make a big move, you're halfway there.

Out of thousands of possible stocks you could trade on any given day, how do we find the small handful that match our criteria? It would be like finding a needle in a haystack if it weren't for the stock scanners I use. I built out these stock scanners with my own development team using real-time market data. The scanners are sort of like radar for the stock market. If something moves, I'll be one of the first to know about it.

Using Stock Scanners

I have customized my scanners to sort through all the stocks and find only the best stocks that meet my specific parameters. This gives me an edge because I only want to trade stocks that I know have the potential to make a big run.

My two favorite scans are Top Gainers and Small Cap – High of Day Momentum Scanner. Both of them scan for stocks that are moving big on high volume.

Small Cap – High of Day Momentum

The High of Day Momo scanner begins running at 4am and continues until 8pm. It picks up stocks that are surging up on high volume and within our price parameters. If I don’t have any stocks that I am watching in the premarket then this will be my go-to scanner.

Small Cap – Top Gappers

The Gap Scanner will show all of the stocks that meet my volume and price parameters but are also gapping up in the premarket, which tells me that they usually have some kind of news catalyst.

I can then sort the scanner by how much volume the stock has had or by what percentage the stock is gapping up.

I have three specific parameters that I use to look for stocks that have the highest probability of making a huge run.

Parameter 1: High Relative Volume

I like to see the stock active in the premarket session with high relative volume. Usually, stocks with news will be gapping up in the premarket on really good volume so I know right off the bat that this stock will have plenty of liquidity for me to trade with size.

Parameter 2: Already up 10% on the day

I need to see that the stock is already moving. This is what tells me other traders are interested in the stock. If a stock has no volume, it won't move. So we need to see the stock moving up and with volume.

Parameter 3: Breaking News

First I look for stocks that are gapping up because of some kind of breaking news catalyst like FDA approval or earnings but we want to stay away from any stocks that are being bought out because they usually don’t trade away from their purchase price. While most of the stocks I trade have news, I don't begin my day by searching for breaking news. I begin my day looking for the biggest percentage gainer, then I check to see what the news is.

Parameter 3: Price

I prefer stocks between $1.00 - $20.00 a share. I've found that over $20 it's obviously more expensive to buy the stock and they also are more difficult to manage risk due to larger swings in price. Below $1.00 due to the stocks trading down to the 1/100th of a penny, I find they aren't as easy to trade.

Parameter 5: Float

Ideally, I want the float to be under 100 million shares but under 50 million is even better. This is because when a stock has a small number of shares to trade and there is a lot of buying interest then it could push shares up very quickly which is exactly what we are looking for.

Once I make my watchlist of the best-looking stocks with the above criteria I will wait for the market to open and see if breakout over premarket highs for an entry or wait for a bull flag pattern.

Figure 5

Penny Stock Chart Patterns

One of my all-time favorite patterns is the bull flag pattern. It is a super simple pattern to spot and has a defined risk point where you know exactly when you are wrong on the trade and it is time to get out.

I want to see the stock run higher and then have a light volume pullback, usually to the 9-period exponential moving average on the 1-minute or the 5-minute chart. The stock should find support at the moving averages where buyers step in to send the stock back up toward the highs. Remember, the stock needs to have a strong catalyst if it's going to attract more buyers.

The key to trading this pattern is waiting for volume to pick back up as buyers pile in and then jumping in with them. This is a classic momentum day trading strategy. It's called, buy high, sell higher. It's not what Warren Buffet is doing, but it's what active traders worldwide have been doing for decades.

Figure 6

My second favorite pattern is a flat-top breakout over premarket highs. Short sellers will often place stop-loss orders just above highs so I know if the price makes a new high we will see their buy-stop orders trigger which will send prices higher.

This pattern isn’t as easy to define risk so you can go about it a couple of different ways. I choose to set a stop at the low of the candle that breaks out above the highs because similar to a Volume Weighted Average Price (VWAP) breakout trade if the stock can't hold this level the basis for the trade is gone.

Figure 7

Are you a Penny Stock Day Trader or a Penny Stock Investor?

In my experience, penny stocks are so volatile, unpredictable, and subject to market manipulation, that being an investor is nearly impossible.

I need to have a short-term outlook in order to survive, and I need to be one of the first traders to get in and the first traders to get out with profit. That's why I depend on my scanners to help me find the strongest stocks as quickly as possible so I can be one of the first traders to jump in a stock squeezing up. The sooner I'm in, the more I can make on a trade.

Remember that a penny stock company can have horrible fundamentals (a poor balance sheet with a ton of debt, no cash flow, and a failing business model) and still spike up 200% on breaking news of a new partnership. For this reason, shorting penny stocks expecting the companies will go bankrupt is extremely risky. The fundamentals will matter eventually, but in the meantime, most investors can’t handle holding a position down 200%. Personally, I’m a penny stock trader. Not an investor.

5 Tips To Live By As A Penny Stock Day Trader

1. Avoid OTC/Pink Sheet-Listed Penny Stocks

   Companies trading on the OTC (over-the-counter) market have fewer regulations placed upon them as compared with stocks listed on the NASDAQ and NYSE. As a result, stocks on the OTC market are highly susceptible to manipulation and fraud. The only penny stocks I trade are listed on the NYSE or NASDAQ. I know these companies are facing stricter requirements to maintain compliance

2. Don’t Fall for the Promotional Pumps!

   Many OTC Penny Stocks become promoted at one point or another. These promotions often contain messages like “This stock will be the next Apple”. The reality is, that the next Apple is not likely to come from the penny stock world. It’s more likely the next big tech company will start as a large company that IPO‘s well above the penny stock price range, and then continue higher. When you buy penny stocks to hold in hopes that it will be the next Apple, you become an investor of one of the most speculative financial instruments on the market.

3. Only Trade Penny Stocks with Volume

   It’s really important to avoid illiquid penny stocks. Most penny stocks trade only a few thousand shares a day. However, when a penny stock has breaking news, it will often trade at 40-50x relative volume achieving 5 to 10 million shares of volume on a big day. These are the days I’ll trade a penny stock. The good news is that there is a penny stock having a once-in-a-year event almost every day! This means as a trader there is almost always something to look at.

4. The Hit and Run Approach

   Once a penny stock has met my standards for being worthy of trading (having news, volume, and being NYSE/NASDAQ listed), I’ll look for one of my Go To setups. These include Momentum, Gap and Go, and Reversal Trades. An important rule is that I should never over-trade these stocks. For that reason, I only take the most obvious setups. I buy in a place where I expect thousands of other traders will also enter. These entries are based on support and resistance patterns. Once I profit, I sell 1/2 of my position and adjust my stop loss to break even. By quickly taking profit and adjusting stops, I ensure small winners at the least. Occasionally I’ll get into a penny stock and get a big winner, but as a trader, I look for many small wins.

5. Making a Living One Trade at a Time

   It’s important that I don’t look to hit home runs. My focus is to trade stocks every day but to focus on small base hits because I've learned that many small base hits add up over the course of weeks, months, and years. My focus is making a living by trading, rather than investing in speculative stocks.

Want To Learn More?

There is far more to learn about becoming a profitable trader than I could fit into this article. If you want to learn more, check out our award-winning trading courses here at Warrior Trading. Investopedia and Business Insider have recognized our course as being one of the best and one of the most comprehensive trading courses available. If you want to take small steps, be sure to check out the Warrior Trading YouTube channel, tune into “Ross Cameron's Podcast”, and read my book “How to Day Trade”.