Warrior Trading Blog

Low Float Stocks: 2 Key Factors to Consider Before Trading Them

Low Float Stocks

What are low float stocks?

Low float stocks have a considerably smaller number of shares that are available for trading and because of this they have a tendency to be extremely volatile due to the lower supply of shares.

Most traders consider a float of 10-20 million to be in the low float category while stocks like Bank of America have a float of over 9 billion! However, you can see companies with floats well below a million.

The increased volatility makes them an ideal candidate for day trading, which can provide excellent opportunities for scalping or position trading these stocks, but just because they have a low float doesn’t mean we automatically trade them.

There are two key factors you need to check before trading them:

  • News catalyst
  • High relative volume

Something else to take note of is low float stocks are shares of companies with extremely high institutional possession that are set aside for trading on the market.

An example: If a firm has outstanding shares totaling 10 million and the limited stocks (which can be termed as closely-held) are 9 million, it implies that only 10% (1 million) of the entire shares are low float stocks and are accessible for public trading.

Typically, corporations deal out closely-held stocks which are possessed by key stakeholders, workers, or other insiders. Low float stocks constitute the minority permitted for public trading (normally 10% – 15%).

What to look for – News Catalyst

It is crucial to highlight that a news catalysts is what usually causes low float stocks to move so much. In view of that, there are possibilities of liquidation in the stocks that provide excellent trading opportunities.

For instance, ($CTRV) recently had positive news on one of their treatments for liver disease causing shares to soar over 200% in one day! This company only has a 525k share float, which means when there are a lot of buyers prices can rip higher very quickly as you can see in the chart below.

CTRV Stock Chart

CTRV Stock Chart

It always wise to follow some kind of stock market news outlet that can provide you with that information.

Word of Advice: In case you are trading a low float stock, it is essential to pursue liquidity. This is because you do not want to be stuck with shares that you can’t sell (before a news event, such stocks do not usually have much liquidity or trading volume).

Benefits: Low float stocks do not have enormous supply. This denotes that any catalyst that triggers demand will have a larger impact on the available shares. Simply put, it suggests that the volatility of the stock is higher. What makes a low float stock risky also renders it potentially profitable to the savvy trader.

Low float stocks can escalate 50%, 100%, and even 200% in one day!

Relative Volume (RVOL)

Volume is key when trading low float stocks. Why? Because without liquidity you can’t trade any size on momentum breakouts and could end up with a ton of slippage.

Relative volume is an indicator displayed as a ratio that checks to see how current volume levels are compared to a previous time frame.

For instance, if stock XYZ had averaged 500k volume per day for the past month but today they are trading at 2 million shares in the premarket, then we know this stock is in play and a lot of traders are watching it. If you were looking at a RVOL indicator it would be at 4 since volume is trading at 4 times the average amount. Anything with an RVOL over 1.5 or 2 is a signal that this stock is meeting volume requirements.

This is a key indicator to check when looking at low float stocks to trade.

Tips on how to trade low float stocks

  • Trading low float stocks are slightly challenging and require special attention and constant observation of any open trades.
  • It is best to be trained on how to trade low float stocks before risking real money.
  • Begin each trading day making a watchlist of only the best stocks with the best setups.
  • Don’t hold them overnight unless you are completely comfortable with the risks involved.

As a result of their high volatility and on the spot price fluctuations, these tools have the capacity to wipe out your portfolio in a blink of an eye.

Also make sure to check out our watch list that updates every morning for the top low float gappers which you can find on our Top Stocks to Watch page.