"Trading the Small Cap Stocks" by Martha Stokes CMT


Trading the Small Cap Stocks

About Outstanding Shares and Momentum Runs

Most Retail Traders only trade big cap stocks. This is because they depend mostly on news for finding stocks to trade. It can also be due to relying upon Industry or Sector selections, often missing out on the underlying stocks that are moving with momentum, but are not a major index component.

Why trade small caps? Because the spreads are now 5 cents and that provides more liquidity and momentum, as more Professional Traders are trading small caps due to the rules for spreads on small cap stocks. 

Why do small caps have such huge sudden momentum runs? Small caps usually have less outstanding shares than a big cap.
An example of a large cap would be a stock with 7,775 million outstanding shares.  By comparison an example for trading the small caps, would be a stock with 67 million outstanding shares. See a chart example of a small cap stock with 67 million outstanding shares below. 


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The candlestick pattern compressed and then moved up 2 days in a row. The higher number of outstanding shares, the more buyers are needed to move a stock with momentum. With a small cap under Dark Pool Quiet Accumulation, the limited number of outstanding shares can increase momentum exponentially as demand suddenly rises. It does not take nearly as many buyers to create huge momentum.

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Typically the fastest largest runs for Momentum Trading either Intraday or Swing Style are found in small caps. These gains can often be huge during highly speculative runs. This is due to the limited number of shares available to trade.

When supply is limited, demand increases exponentially and momentum runs occur. The additional benefit of wider spreads draws Professional Traders to these stocks.

During insipid Market Conditions finding stocks with momentum for Swing or Day Trading can be a challenge. With the new wider spreads on small caps, Professional Traders are more inclined to trade these stocks as the gains are higher and the action is faster.

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Summary

Scans built around criteria that identify Dark Pool Quiet Accumulation and compression patterns, provide excellent stocks to consider during quieter market activity.

Three factors are needed for finding and trading small cap stocks that will move with momentum during insipid Market Conditions:

1.  Percentage of Shares Held by Institutions PSHI indicator needs to be high.
2.  Accumulation by Dark Pools needs to be going on under the radar of High Frequency Traders.
3.  Price patterns which are revealing Dark Pool activity.


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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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