Penny Stock Scanner: How to Use One and Best Settings (2024)

Ever wondered how the best penny stocks traders always seem to be on top of the action, with seemingly little effort? Let me assure you, it’s not because they have eyes everywhere. In fact, there’s a much simpler explanation. In almost all cases, it’s because they use a penny stock scanner.

This guide will teach you all about penny stocks scanners. How they work, what to look for when choosing one, and how to find penny stocks before they take off.

Table of contents

What Are Penny Stocks?

Most think of penny stocks as any publicly listed company trading below $1 per share. However, others apply a slightly broader definition than that.

For example, according to the SEC, a penny stock is any small company that trades below $5 per share.

Without getting too bogged down in the precise definition though, penny stocks have a few discernible characteristics.

Put simply, these are:

  • Low market cap (typically below $1bn)
  • Low float/tightly held by insiders
  • Thinly traded
  • Mainly found on OTC markets

In summary, penny stocks are small, tightly held companies that trade in opaque, OTC (over-the-counter) markets, such as the “Pink-Sheets” market. They also tend to be much more volatile than blue-chip stocks due to their low liquidity.

It should be said that not all penny stocks trade over-the-counter. Some trade on major exchanges such as NYSE American (formerly AMEX).

Risks of Penny Stocks

Penny stocks tend to be much riskier than companies trading on major exchanges. The reason being that SEC listing requirements are much looser for stocks that trade on a quotation system rather than an exchange. Indeed, pink-sheet listed companies have no requirements in order to list.

In addition, penny stocks have no obligation to submit annual or periodic financial reports to the SEC. This lack of transparency makes it virtually impossible for the average investor to assess its prospects.

Another key risk for penny stocks is liquidity – or lack thereof it. Since they attract less attention from investors, they tend to trade much less frequently than well-established companies. Therefore, finding anyone to take the opposite side of your trade becomes a challenge, and means you probably won’t get the price you want. As such, it’s sensible to use limit orders when trading penny stocks.

The other symptom of low liquidity is high volatility. Because very few shares trade on a given day, it means that even modest-sized orders can impact the stock price significantly. Of course, volatility is one of the appeals of penny stocks, because it can bring high rewards. However, with high rewards comes greater risk!

How to Find Good Penny Stocks

There is no one-size-fits all answer to finding “good” penny stocks, as it largely depends on your trading style.

What a fundamental-driven trader considers as “good”, might have no resemblance to what a technical-driven day trader considers as “good”.

With that said, I will lay out some of the basic qualities penny stock traders look for. In doing so, I hope to cater for everyone.

Starting with the fundamental side of things, you want to conduct some basic research on the company. What does it do? Does it seem like a legit business? What are its future prospects? Does it constantly dilute existing shareholders?

Fundamental Factors

  1. Track record of producing financial reports: The more information you can gather about a company the better. The more transparent they are about their financials, the less likely it is to be a scam.
  2. Profitable at some point in the past: You want to see “proof-of-concept” for its business model.
  3. Management has a clear plan for the company: Management should have a clear vision for the company, and a viable strategy to achieve it.
  4. No Dilution: If a company has a history of issuing shares to raise capital or to fund employee stock options, this is a red flag. Issuing new shares dilutes the ownership percentage held by other investors and causes the share price to drop.
  5. News Catalyst: Penny stocks tend to surge on big news announcements, such as new product launches, partnership agreements, or M&A deals.

As mentioned earlier, these things are hard to gauge for penny stocks. That’s why penny stock traders lean more towards technical analysis and trade over shorter-time frames. Why risk “investing” in penny stocks, when you could get burned by some unforeseen event at any moment?

Here are some of the key technical qualities that traders of penny stocks look for.

Technical Factors

  1. Sufficient Volume: If a stock doesn’t trade enough shares, you can’t enter a position in any meaningful size and may get unfavourable prices.
  2. High Relative Volume: High relative volume stocks receive a lot of attention from the market and tend to witness explosive moves.
  3. Large Short Interest: Stocks that have a large percentage of their float shorted present prime short squeeze candidates.
  4. Momentum: Stocks breaking out to new highs or lows, crossing moving averages, or displaying other technical patterns attract the most attention from day traders.

While all this sounds great, you’re probably asking yourself how on earth to perform this analysis across thousands of stocks every day. Surely it’s like finding a needle in a hay-stack?

Fear not, however.

This is precisely what a stock screener is for…

What is a Penny Stock Screener?

A stock screener is a tool that lets traders filter stocks based on pre-defined criteria. In other words, it helps them pinpoint stocks with their desired characteristics.

A penny stock screener is exactly the same. Except the focus is specifically on penny stocks.

Since penny stock trading is synonymous with day trading and technical analysis, you’ll find the emphasis placed more on filters like: price, percentage gain, trading volume, new highs, breakouts, and similar criteria.

In essence, stock screeners take you right to where the action is, saving you a bunch of time researching mundane stocks. You still have to put in the work, but there’s no doubt that screeners make your life much easier.

Difference Between Stock Screeners and Stock Scanners

The definitions of stock screener and stock scanner have become slightly blurred over the years. While there are certain nuances that differentiate them, they are, for all intents and purposes, one and the same thing. Hence, they tend to be used interchangeably.

If you want to get into the weeds though, a scanner updates results in real-time, whereas a screener shows results at a point-in-time.

In other words, a scanner is constantly “on”; live-streaming new alerts as they occur. A screener, on the other hand, requires a manual update to see new results.

What to Look For in a Penny Stock Scanner

First and foremost, whichever scanner you choose has to include penny stock data. Otherwise, it’s a non-starter. For the serious penny stock traders amongst you, OTC data is a must. So this needs to be included, or at least available as an add-on.

In addition, most penny stock traders are day traders, which means you need a platform with premarket data. Day traders perform most of their scans before the market open, so that they have a watchlist of stocks to monitor throughout the day. Read my review on the best premarket stock scanners for further information on this.

Getting your hands on the data is just the start, however. Now, you want to ensure that it’s delivered to you with speed. Speed is the name of the game with day trading, after all. Therefore, the platform provider needs robust technology; capable of streaming data in real-time with zero latency.

Once you’re happy with the accuracy and timeliness of the data, you need the right tools to manipulate it. Any penny stock screener worth its salt needs the following tools:

  • Volume and price change filters
  • Extensive list of technical indicators
  • News streamer
  • Real-time charts
  • Broker integrations

These will let you customize scans to your liking, stay on top of market-moving news, and quickly pull the trigger on trade ideas.

How to Use a Penny Stock Scanner

Using a penny stock scanner is pretty simple.

You select your scan criteria, choose the stocks to apply them to, and click “scan”.

That’s it.

Knowing what to include in your criteria is where the “art” comes into it.

Unfortunately, there is no “silver bullet” criteria that works on all stocks and in all market conditions. Part of the skill in trading is adapting your strategy to the environment you’re in.

For example, in a raging bull market, you’ll want to put more emphasis on new highs scans. In a similar vein, new lows scans work best in bear markets. In a dull, range-bound market – where breakouts are few and far between – high relative volume screens will take you to where the action is. News scanners help you achieve the same thing.

Below is some examples of these.

Best Penny Stock Scanner Settings

While there is no such thing as “best” stock scanner settings (as markets change all the time), here are some popular scanner settings for you to try.

All of these examples use the Scanz stock scanning platform.

Volume Breakouts

A volume breakout scan looks for stocks trading with above average volume. The rationale being that there is usually a reason behind this heightened trading activity e.g. some fundamental catalyst like an earnings surprise.

There are 2 ways to find stocks with volume spikes in Scanz.

Scanz Breakout Scanner

The first way uses the “Breakout Scanner”, which provides a live stream of all the stocks with above average volume.

Simply choose the time-frames to calculate average volume over, and see the stocks breaking above those average volumes in real-time.

Penny Stock Scanner: How to Use One and Best Settings (1)

Scanz Pro Scanner

The second way to find high volume stocks in Scanz is to use the “Pro Scanner”.

The Pro Scanner lets you be much more granular and specific with your scanning criteria. With over 100 technical and fundamental indicators at your disposal, you can customize endless scanning rules.

For example, the scan below is looking for stocks with daily dollar volume greater than $500,000, and daily volume greater than their 20-day average by 5% or more. I only apply this to the OTC market to exclude blue-chip stocks.

Penny Stock Scanner: How to Use One and Best Settings (2)

Here is a snippet of the stocks that met those rules.

I can also apply extra filters to narrow my focus even further. For instance, here I set a maximum share price threshold of $5. This ensures I’m looking purely at penny stocks.

In addition, I can set a maximum float constraint if I only want to look at low float stocks.

Penny Stock Scanner: How to Use One and Best Settings (3)

The stocks with news notifications next to them always pique my interest. Remember, penny stocks can move significantly when there’s a wind behind them.

As a case in point, here you can see that NaturalShrimp (SHMP) had a big move today off the back of this news.

Penny Stock Scanner: How to Use One and Best Settings (4)

Further inspection reveals they have just announced a partnership with US Foods – opening up a whole new revenue stream for them.

Penny Stock Scanner: How to Use One and Best Settings (5)

This is a great example of how to find penny stocks worth trading.

New Highs/Lows

Another popular penny stock scanner searches for stocks hitting new highs or new lows.

These are stocks that have broken through a previous point of support or resistance, and can potentially go on to make sustained moves in the same direction. In other words, it’s a great way to identify breakout in stocks.

Usually, it helps if this price action is accompanied by strong volume. This indicates that a move might have legs to it.

The scan below has the following rules:

  1. Daily dollar volume equal to $500,000 or more
  2. Daily volume greater than or equal to the 20-day average volume
  3. Last price greater than 20-day high
  4. Share price less than $5

This is a new highs scan, but a new lows scan carries the same logic in reverse.

Penny Stock Scanner: How to Use One and Best Settings (6)

This generated 3 results.

Penny Stock Scanner: How to Use One and Best Settings (7)

As you can see, this scan is great for detecting stocks with strong price momentum.

Admittedly, the move looks a bit extended now. But had we run this scan a few days ago – when it initially hit new highs – we could have potentially made a big profit.

Penny Stock Scanner: How to Use One and Best Settings (8)

Gap and Go

The Gap and Go strategy is a staple penny stock scan. It’s a momentum screen that looks for stocks trading significantly above the previous day’s high for a bullish signal, or significantly below the previous day’s close for a bearish signal. Optically, this creates a “gap” on the chart between today’s and yesterday’s candle.

When this is accompanied by strong volume, it increases the likelihood of a prolonged move.

The scan below looks for bullish penny stocks that are gapping up on strong volume.

Penny Stock Scanner: How to Use One and Best Settings (9)

Remember NaturalShrimp from the high volume scan earlier? Well, here it is again the next day. Still trading on high volume and now gapping up on the chart.

Penny Stock Scanner: How to Use One and Best Settings (10)
Penny Stock Scanner: How to Use One and Best Settings (11)

Even more impressive was the move in Simplicity Esports (WINR). After announcing an exchange agreement with Diverted River Technology, it’s share price gapped up and exploded 456%.

Penny Stock Scanner: How to Use One and Best Settings (12)

Scanz Free Trial

For more information about Scanz, including how to claim a free 14-day trial, read here for an in-depth Scanz review.

How to Trade Penny Stocks

Day Trading

Day trading is generally the most popular strategy for trading penny stocks. When you day trade, you’re looking to capitalise on those explosive intraday moves before making a timely exit the same day. Read this article to see how to find the most volatile stocks for day trading.

Swing Trading

Swing trading, on the other hand, takes a slightly more patient approach than day trading. Instead of limiting yourself to intraday trading, you might hold onto a position for a few days until the share price hits your price target.

Swing traders usually target range-bound stocks that have easily identifiable points of support and resistance. In turn, these define the entry and exit points of your trades.

Position Trading

Position trading takes a longer-term approach, and is more akin to investing. Rather than holding a position for a few days, you might hold onto it for a few weeks.

While the rewards with this strategy can be great, it comes with the risk that penny stocks are extremely volatile, so you need to have the conviction to hold your nerve. This is easier said than done given the opaque nature of penny stocks.

Can You Get Rich Trading Penny Stocks?

I’m sure you’ll be able to find many success stories on the internet about how some bedroom trader turned a $1000 account into a multi-million dollar empire.

For example, Timothy Sykes claims to have made $7m in profit from trading penny stocks.

Whether these stories are true or not is up for debate (I have my doubts), but I’m sure there’s ways to make money in penny stocks (just like anything).

However, whether this is the best way to make money in the markets, or achievable on any long-term basis? I’m yet to be convinced.

Penny stocks are highly risky, and the lack of information surrounding them makes it incredibly difficult to gain an edge.

Therefore, my advice would be to approach penny stock trading with caution, and don’t risk a huge amount of capital towards it. And. Whatever you do, don’t fall into the “get rich quick” mindset.

What is the Best Scanner for Penny Stocks?

As you can tell from the demonstrations in this post, one of my favourite scanners for penny stocks is Scanz.

With over 100 different price, volume, technical, and fundamental filters, as well as real-time news from 100 different news sources, you can be sure to have your finger on the pulse at all times.

Trade Ideas is another great scanner for penny stocks, which you can read all about in my Trade Ideas review. Two other alternatives are TC2000 and Finviz Elite, however note that these only cover penny stocks listed on major exchanges (i.e. no OTC stocks). And, while Finviz is cheaper, scan results only update every 10 seconds (as opposed to real-time).

If you’re looking for a technical stock screener aimed at larger stocks on a global basis, I would recommend MetaStock instead.

As an experienced trader and enthusiast in the field of penny stocks, my extensive knowledge allows me to delve into the concepts covered in the provided article. The article discusses the use of penny stock scanners, the characteristics of penny stocks, associated risks, and various strategies for trading them. Let's break down the key concepts:

  1. Penny Stocks:

    • Defined as publicly listed companies trading below a certain price per share (often $1 or $5).
    • Characteristics include low market cap, low float, thinly traded, and mainly found on OTC markets.
    • Tend to be more volatile than blue-chip stocks due to low liquidity.
  2. Risks of Penny Stocks:

    • Looser SEC listing requirements and lack of transparency.
    • No obligation to submit regular financial reports, making assessment challenging.
    • Low liquidity leading to challenges in finding counter-parties, and high volatility.
  3. How to Find Good Penny Stocks:

    • Fundamental Factors:
      • Track record of producing financial reports.
      • Profitability at some point in the past.
      • Clear management plan, no dilution, and potential news catalysts.
    • Technical Factors:
      • Volume, relative volume, short interest, and momentum.
  4. Penny Stock Screener:

    • A tool for filtering stocks based on pre-defined criteria.
    • Focus on penny stock screeners includes filters like price, percentage gain, trading volume, new highs, breakouts, etc.
  5. Difference Between Stock Screeners and Stock Scanners:

    • Nuanced difference - scanners update results in real-time, while screeners show results at a point-in-time.
    • Used interchangeably, both help in narrowing down stocks based on specific criteria.
  6. What to Look For in a Penny Stock Scanner:

    • Inclusion of penny stock data and OTC data.
    • Availability of premarket data for day traders.
    • Fast and accurate real-time data delivery.
    • Tools like volume and price change filters, technical indicators, news streamers, and real-time charts.
  7. How to Use a Penny Stock Scanner:

    • Select scan criteria, choose stocks, and initiate the scan.
    • No universal criteria; adapt strategies to market conditions.
    • Examples of popular scanner settings like Volume Breakouts, New Highs/Lows, and Gap and Go.
  8. How to Trade Penny Stocks:

    • Day Trading: Capitalizing on intraday moves.
    • Swing Trading: Holding positions for a few days.
    • Position Trading: A longer-term approach, similar to investing.
  9. Can You Get Rich Trading Penny Stocks?

    • Stories of success exist, but penny stocks are highly risky.
    • Caution advised, and a "get rich quick" mindset discouraged.
  10. Best Scanner for Penny Stocks:

    • Scanz is highlighted as a favorite scanner, offering various filters and real-time news.
    • Trade Ideas, TC2000, and Finviz Elite are also mentioned as alternatives.

In conclusion, the article provides a comprehensive guide to understanding and navigating the world of penny stocks, covering fundamental and technical analysis, risk factors, and the use of scanners for efficient stock selection.

Penny Stock Scanner: How to Use One and Best Settings (2024)
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