What's up everyone? Ross Here from Warrior trading in today's episode I'm going to walk you through how to day trade stocks with bigger spreads. today. we have a perfect example: a stock that makes a huge move. but the whole time it had a big spread.

it goes from 12 a share up to 15 to 18 to 20 22 25. Wow, it's 100 right there. Goes up to 30, 35, 40, 45, 50, 55 to a high of 57 a share. This is wild.

That's a ton of volatility. A lot of opportunity. but the whole time I had big spreads. Right now the spread is 60 cents as I look at it right now.

Wow, so how do we trade that? How do we manage our downside risk while participating in the upside potential? We have to think about risk because we're Traders here, not gamblers, right? So we've always got to think about risk first. So I'm going to walk you through the way I Approach trading these stocks I've trade stocks with big spreads over the years and I've had some phenomenal trades, but I've also gotten burned a handful of times. Well, probably more than a handful. so I can share with you some of my lessons that I learned the hard way on trading these stocks to bigger spreads.

I Hope you find this episode interesting. If you do, and you want to learn more about my day trading strategy, there'll be a link that you can check out right in the description where you can download my Gap and go strategy as a PDF. My micro pullback strategy also has a PDF. and my Technical Analysis series also as a PDF.

So you can download those, you can print them out. You can keep them right on your desk and those will help you in your trading, so make sure you check those out. Link is right in the description and let's go ahead and jump in by looking at this stock. OMH Okay, so this thing makes a huge move today.

Right now, it's on the back side of the moves. We're coming into the close. only got about 24 minutes to the 26 minutes to the closing bell. Kind of looks like a head and shoulders pattern.

uh The Squeeze up the shoulder here, head and then the leg back down. So as you can see during the move up, you know it's a big move. There's no question about it from twelve dollars to a high of 57 even. But the whole time it was trading with bigger spreads.

In fact, there was one point where routinely this was 50 cents to a dollar a share. but I saw a spread of three dollars a share at one point. And if we look closely at this candle, let's see I could show you a candle that has a nine point range. You want to see that? Okay, look at this thing.

Look at this candle right there. See that little guy right there. Holy smokes, that's nine points in one minute. All right.

So we've got a lot of risk here on this stock. We have to figure out how to manage our risk. So for those of you guys that aren't familiar, let me give you a two minute lesson on the bid ask spread and I've got my whiteboard up right here. So every stock trades with a bid ask spread, you've got the best buyers on the bid, the highest price buyer is right here, and then the lower price lowest price sellers right here.

And in this case we've got a 50 Cent spread now. I Don't mind trading stocks that sometimes have a bigger spread because if you think about it, what is the bigger spread, tell us. It tells us the stock has the potential to move very quickly, right? Why would a stock have a bigger spread? Well, if you had a lot of buyers and sellers, then orders would fill in, thus creating a tighter spread and more liquidity. Which means the Stock's not going to move up very quickly, but it's also not going to drop very quickly and that's appealing for investors.

So a stock like Bank of America you know these are. these are going to be thickly traded stocks. That's a good thing, but we're Traders We like volatility, so a little bit of a more thinly traded stock that's okay and that usually comes hand in hand with a slightly bigger spread. But then you have something like OMH and dare I say too big of a spread? too much volatility I Don't know I I Beggars Can't be choosers, but this is quite the spread.

So what ends up happening here? Uh, sometimes Traders say Russ You know I find it interesting I Get this feedback all the time. Ross You don't talk in terms of percentages. You know you're always talking about how much you made. You're up.

Three thousand dollars. Five thousand Twenty thousand. Whatever it is. What is that in percent? You know how much money did you put into the trade, how much of your account did you put into the position? and I don't talk about it like that because I don't think about it like that at all.

I'm always thinking about this. these trades in cents per share. Why is that? It's just the way I think a lot of Traders think uh day Traders like myself. So if I buy a stock I'm thinking about quantity of let's say 5 000 shares.

Let's say 10 000 shares. to keep it simple. So if I make 15 cents a share, that's 1500 bucks, right? That math is easy. 1500 bucks is the same.

15 cents. Whether I got it on a three dollar stock and you know that's a five percent return or I got on a thirty dollar stock and it's only a one one percent return or whatever. Less than one percent return? It doesn't really matter. 15 cents is 15 cents.

That's the way. I Think about it. So here's the problem. Let me show you this.

So if we have a stock that has a spread bid, ask spread of 31 10 by Thirty One Six: That's a 50 Cent spread. So if I want to take 10 000 shares of that stock, let's forget about the fact that that's 300 Grand in the position I Don't really think about that generally speaking, because for me, I'm really thinking about my risk in these senses. Uh, in these terms. Number One entry: The difference between my entry and my stop.

That's my risk. All right. So if I'm getting in at 31.10 and my stop is 31 even, I'm risking 10 cents now. I'll tell you the fact is, with a stock like this, and when you see a spread like this that right now is 29.50 by 2980, but you see it's jumping around, you're not going to be able to get a 10 cent spread.

sorry, a 10 cent stop. There's no way your Stop's going to be as small as 10 statins. In fact, most likely you should look at whatever the spread is and figure that's most likely going to be your stop. So if you have a 40 Cent spread, you should probably have a 40 Cent stop below the bid.

All right. So in other words, on our whiteboard here: if we're in at 3110, our stop is probably going to be you know, 30 60. 30 50. Something like that.

That's realistic. Okay, so now this is a problem because most momentum day Traders When we buy, we're buying at the Ask. So we buy the breakout here. If we're in at 31.60 with a buy order, our stop is now 30 50.

Stop. Uh-oh so what's the problem here? Our stop is a dollar and 10 cents away per share on 10 000 shares. That's 11 000 bucks. Now, it doesn't matter if you're trading with 10 000 shares, you're trading 100 shares.

It's still a dollar and Ten cents. Which means how much should you stand to make on this trade in order to justify the risk? All right, so you need to be able to make, You need to be able to have the potential for two to one. That's kind of a rule of thumb Golden Rule For most Traders Which means here, we need the potential of two dollars and 20 cents per share of profit. Okay, we're setting the bar pretty high and this is where we have a problem with these types of stocks.

We're setting the bar. High It makes it harder to be successful. In fact, you take one loss of a dollar ten a share that would wipe out so many small winners. And a winner on this of 50 cents or 75 cents a share isn't enough to justify the risk that you took on the trade.

Okay, so now if you need two dollars and twenty cents per share in order to justify the risk, you're gonna have to be really selected about what setup you're willing to take. So now let's look back at the chart. Show me a really good setup on this chart. Son of a gun.

I Don't even see a single really good setup. and I'm being honest here. I Don't see a single fantastic setup on this one minute chart. You could say it moved really nicely right here.

but what setup was that? What setup was that entry? Why would you have bought here and not bought right here both times? You know, looks similar, but it went here the trade through the high a day. That's way too risky. Look at the false breakouts you had here. False break out there.

false breakout there right here. Pull back. Okay, maybe so that that might be one of your cleaner setups that first pullback following a fresh breakout. but let's look at the low of that candle.

the lower that candle down there was 36.35 and your first one minute candle to make a new high was at 40. So Based on technical analysis, our proper stop is at the low of that candle. Now that's using a stop, not based on your spread in level two. You know this stop here of 30 50.

that space purely on the level two. and you don't. You don't really want to set your stop based on that. you want to set your stop based on actual support on the chart.

Which means you have a four point stop. A four point stop. Now you need to get eight points to get your two and one profit loss ratio. That's that doesn't even make sense.

And then you get this false breakout as you can see right up here. False break, False break this big whip up here. Another kind of nasty move here. and then we were on the back side.

So to be honest, I don't see a single clean setup on this particular stock today. Now there's other stocks that I've traded that have big spreads that did end up giving us some nice, um, some nice pullbacks, some nice clean entries, but this unfortunately just didn't happen to be one of them. So on this particular stock, you sort of had two options. One, you could have taken some breakout trades like that entry at forty dollars and just done like a quick scalp.

You know you're in it and you try to get out quick. You're not going to have good profit loss ratio on it because if you take that trade and you lose, it's going to wipe out a lot of the small winners. But you could have done that now. I Wouldn't probably encourage that because you would need to have like 80 accuracy to make money because like I said, if you have one loser, it's going to wipe out the winners.

So for most beginner, Traders there there isn't a single setup that probably would have been safe to trade on this on the one minute chart. Now if you look at the five minute chart, you might say that this setup here around 29 maybe made more sense, but again, given the spreads given the three topping tails in a row I think the risk was really high to take that even as a five minute set up for any beginner. Trader I Don't think that you have good risk reward on this particular stock. So but let's look at the Whiteboard here for a second.

Something that's kind of interesting. Let's just um, let's let's change the numbers here a little bit. Let's Pretend For just a second that we're dealing with a stock that's three dollars and eleven cents instead of 31.10 and it's three dollars and 16 cents. Okay, so now we just we've got a five cent spread instead of 50 Cent spread, right? You see what it did there.

It's just divided by 10. All right. Now this now this is a different ball game. I'm totally okay with trading this now.

What's what's funny is for those of you guys who think in terms of percentages, these are the same ratios right here, right? this is to this as that is to that they're the same and yet this to me is completely different. I'm totally comfortable getting in this at 316. 311 Five cent stop, right? So five cent there add another five cents. So now you're down with a stop at like 306..

So you got a 306 stop Just like that's like the tightest stop you could probably get that feels reasonable. And this is a stock that we trade like this all the time and we routinely will see a squeeze up to 325 330 340.. But you know what? It's a lot easier for a stock to go up 30 cents a share right here. Like this.

That is for it to go up three dollars a share. They're the same percentage. Well, it doesn't quite matter. 30 cents is easier than three dollars a share.

It's just the way it is. That's why I Really like trading stocks that are between two dollars. Uh, two dollars and twenty dollars. So my kind of rule of thumb and and if we if we look at this stock today and many of you guys who who know the way I trade and you're familiar with my strategy, you know that I I Kind of have this rule of thumb where I focus on stocks are up at least 10 percent that have relative volume of at least five that have news that have a price between two and twenty, and they have a float of under 20 million shares.

That's kind of my five criteria. Now there are stocks that are going to be within that range that I like more than others. There's some other factors that can make a stock especially exciting. Uh Blue Sky Setup recent IPO Recent reverse back different things like that I talk about that a little bit in some of those.

PDFs So if you go to the description and you download those, the micro pullback, the Gap and go, and the technical analysis series, you'll see some more content around what I Really, really like. But the fact is OMH today. Well, so this is a problem. The Floats: 20 million shares.

Okay, so that that's all right. Uh, it was up more than ten percent. Okay, but if you look at the chart, uh, this one had a little bit of an unusual chart pre-market It made a big move up to 30 if you see this and then it's sold off. Whoa.

So now this is a different context. So the context of this specific chart shows us that when it was at 14, it was 50 off. it's pre-market High So now when it came back to 28 29, it was sort of a double top. Ah man, that's a weird setup.

this pullback. So so now you're starting to get a little bit more context of why. This one may have been a little harder than another stock that had similar spreads, but didn't have that same kind of weird pre-market chart. So one of the things I'm going to focus on are stocks between 2 and 20 because again, it's easier to get 30 cents or 50 cents than when you're trading a stock that's 30 or 40 and your profit loss ratio needs to be two to three dollars a share.

They're just going to be more difficult, especially for those of us that like to do quick breakouts. Get in, get out. Because one of the other things that I'm thinking about with risk: I'm thinking about the difference between my entry and my my stop, right? So that's my risk and it's in cents per share. Cents per share is easier to manage on the lower price side of things.

but I'm also I Do think about risk in terms of total exposure. So a 30 stock, 10 000 shares is 300 Grand right? That that is a lot of money. Now that's usually not a problem, but you know it's a lot of exposure. and if you have that exposure risk and then you have to hold that trade for a long period of time to get your two three, four five points, that amplifies the risk on the trade.

So to me, it feels so much easier in a way to be focusing on the lower price stocks getting 20 to 30 cents a share. Doing that with five or ten thousand shares, getting two or three thousand dollars, then trying to mess around with a thirty forty fifty dollar stock with a two point spread or one point spread where I might feel that I can only take 500 or a thousand shares. but even then I'm not going to get the same upside potential because this is the other thing that I sometimes think about in uh with these lower price stocks I'll just show you for instance. So let's say we have a stock that squeezes up here and then I'll just draw the candle same color just just for the sake of this argument.

And then we have a little doji right here. So a little bit of a pullback and let's say we get in right here. and let's just say this is three dollars and ten cents. So I get in here and this would be a trade where I buy 10 000 shares.

Now I've got to stop at three dollars which let's just say is the lower that candle and the target is a squeeze through 320 for 330.. all right, so we only need to get 20 cents to get two to one profit loss ratio. So now if this thing goes up to 330, what I can do is I could easily say you know what, this thing feels really strong I'm going to add another 10 000 shares here at 330. my new cost basis is 320 but now I'm holding 20 000 shares and when it goes up to 340 or 350 all of a sudden, oops, All of a sudden I'm up five thousand dollars and that's only on a 40 50.

Cent move that that's not outrageous. It's not outrageous for me to hit five thousand dollars on that kind of move. But now we change this around. we say, well, wait a second, You know we're buying a thirty one dollar um and 10 cent stock with a stop at 30.

I'm not taking 10 000 shares. So now I'm taking just a thousand shares. All right. And if it goes to 33 and and seriously, if it goes to 33 and I'm up two dollars a share, um, I'm probably not gonna add I'm like two dollars a share is huge, so you know to actually get that move up to 35.

That's four, five, six points. It's very rare to get that in one single candle, and if you do a lot of times, the liquidity on the stock is really difficult and you have this huge spread where you've got 35 on the ass. but you've got 33 on the bid and that's what kept happening today with OMH is the ask would squeeze up so it at one point we went up to 55 on the ask but the bid was still 52. and it's like I I need that bid to climb up.

If you're gonna get out, you're gonna hit the big. You need the bid to climb up if you're gonna sit on the ask. you need more volume so one of the things that will is important to look at is the relative volume but also the total volume. Last year we had stocks a lot of Chinese stocks like HKD that made two thousand three thousand percent moves but on such light volume.

it was so thinly traded it was like on air. It was like a feathers. it's a feather and the thing would pop up 15 points and then flush 20 points. The thing went over two thousand dollars a share, but it was.

It was so thinly traded. Um I gotta be walking on thin ice. you didn't know when you were gonna fall through and so it was sort of impossible to feel confident trading it. The liquidity was terrible and that's something that you really do want is you want good liquidity because that's what allows you to take bigger size a trade that you know you can make money, but the biggest position you can take is only 100 shares I Don't know to me that doesn't feel scalable, it doesn't really feel worth it.

I would rather trade something that I could take 50 000 shares of if I wanted to in order to be able to do that. Ultimately, I'm gonna need trade to trade stock that's got probably more than 10 million shares of volume and in fact I find that I make the most on stocks that have more than 10 million shares of volume. So you know these lighter volume stocks. and again OMH right now is at 7.6 million shares.

But you know it's four o'clock so it is below my threshold. And this one, you know being below threshold and just the way it trade. today, it wasn't safe. The risk? It just wasn't low enough.

unfortunately. So you've got to be able to measure your risk versus your reward. And at the end of the day, if you don't feel you can, then the right move is to walk away. In fact, we had a stock today.

Uh, Hcdi and I'll pull the chart up on this one. Uh, this one at the Open. This thing was wild. So at the Open right here it halts up how much volume was in that candle? That candle right there has 39 000 shares of volume.

That's it. And it halt it up. It halted up at 7.89 and then it resumes and goes up to a high of 9.50 And so when this was halted up at 789 and then showing a resumption of I don't know. Nine dollars I was like how is this, How is I mean 39 000 shares I How much of that would you have been able to buy? I Mean obviously it's a free market.

If you want to buy 10 000, you can probably try to, but you got a lot of slippage. I Don't think you fill the whole order. You know All of a sudden the sellers were just gone. so that's how those spreads all of a sudden open up.

You know you have a stock where you know you've got your bid, ask and it's you know, five dollars, five dollars on the bid, and then below that is 450 and then four, and then 350 and then three. and next thing you know one big seller comes in and it drops on the flip side. you know on the ask, you have, um, you know you have your your seller at 550 and then you've got six, six fifty, Seven and then all of a sudden 8, 9, 10 and just like that the stock can squeeze up. But the problem is without liquidity, you're not gonna be able to take big positions and I just feel like if you can't take a big position I Sort of have this philosophy that if I can't take at least 10 000 shares of a stock, it's almost not even worth my time to trade it at all.

I just feel like what's you know what? What's kind of the point Now again, this is me being someone who trades with fairly big size on a regular basis. but I some some Traders will say who cares, just trade with 10 shares, just trade with a hundred. but I just feel like if the liquidity doesn't support taking big size, then it's not even worth trading at all. And unfortunately we sort of have this um this interesting Spectrum here where you've got, um, you know you've so this is.

so this is this is what I'm gonna do I'm gonna draw a bell curve. All right. So that's a perfect bell curve. And over here we have Bank of America liquid.

and this is liquidity from liquid to illiquid. All right. So Bank of America is very liquid, no interest, right? It doesn't move. It's not.

It's so thickly traded. In fact, this is a great investment vehicle. It's a bad stock to day trade because it's not liquid. No one's going to disagree with this.

So this is just a stock that doesn't move and then you start to have some that move a little bit more. maybe? Apple um maybe you have, um Tesla right? And then you're gonna have this sort of window of small cap stocks. You know you've got large cap, mid cap, small cap and so this is kind of the area where I'm gonna see I'm not going to trade here at all. but I'm going to trade a lot.

So this is like my quantity of Trades trade a lot and then once you get over a certain level of volatility and volume starts to decline, you have those HKD stocks like the Chinese stock last summer or you have an OMH. These ones just start to get kind of on this side of the illiquidity spectrum where you know again, like you could trade them Just like you could trade this with 50 000 shares and try to make three cents and make 1500 bucks. You could trade this with 300 shares and try to make 10 points and make three thousand. but I I Just find that they're difficult to trade.

so this is kind of The Sweet Spot in here and when it comes to a spread. I Would say stocks in this range are typically going to trade with a spread of less than 30 cents less than 25 cents. So you may vary down here. you've got one cent spread.

This is a one cent spread. Here you might have five to 15 cent spreads. We could take a quick look at Tesla and just see what the spread is on that one. Uh, let's see.

Tesla So fairly tight spread on that right now, right? Meta: fairly tight spread 3 4 cents. Um Apple Fairly tight spread here, right? You know? Again, these are all. these are all pretty tight spread now. Amazon Again tight spread.

So yeah, I mean you really? you? Uh Pepsi This one's going to be a little bit more thin, but still a pretty tight spread here. on this one, it's a little higher, higher price. So then you have Evox, Evox this one. Uh no, sorry, uh, Elox this one.

Uh oh. It looks like it's halted right now, but this one was trading with like 10 15 cent spreads. so spreads were a little bit bigger on this one. Not crazy.

let's see. Um, we had Gsit four Cent spread right? So you know. So we kind of get into this range here of spreads in this area between you know, between five cents and maybe like at the high side of what I'd be willing to trade like maybe 50 cents. this would be sort of on the high side and then in here you get like one to two dollar to five dollar spreads and that just gets crazy.

Again, you know this is just my two cents on it. Uh, but I have the special request to do an episode on trading stocks with bigger spread. so I hope you find it interesting if you do. I hope you hit the thumbs up I Hope you're subscribed to the channel and if you want to check out my link right down below in the description uh, you can download.

There's a bunch of PDFs You can download on my Gap and Go strategy, my micro pullback strategy, and my technical analysis Series So check those out and stay tuned for the next episode coming soon. Thanks again as always for tuning in and hey reminder if I didn't already mention it. Trading is risky most beginner Traders lose money so do yourself a favor and practice in a simulator before or you put real money on the line. All right.

I'll see you guys back here for the next episode real soon.