STOP Losing Money: 3 Small Cap Rules 🤯

Key Concepts

• Volume Weighted Average Price (VWAP): A trading benchmark that shows the average price a stock has traded at throughout the day, based on both price and volume.
• Pre-Market High: The highest price a stock reaches during trading before the official market open.
• Liquidity: The ease with which an asset can be bought or sold without affecting its price.
• Small Cap Trading: Trading stocks of companies with a relatively small market capitalization.

Trading Rules for Small Cap Stocks

The video outlines three specific rules for successful small cap stock trading, focusing on identifying stocks with sufficient momentum and liquidity. These rules are presented as strict criteria for entry into a trade.

Rule 1: Trading Above VWAP

The first rule dictates that a small cap stock must be trading above its Volume Weighted Average Price (VWAP). This is presented as a fundamental filter. The rationale is that trading above VWAP indicates positive price momentum and suggests institutional buying pressure. VWAP serves as a benchmark for average price paid throughout the day, and exceeding it signifies strength. No specific numerical threshold within VWAP is mentioned – simply being above it is the requirement.

Rule 2: Exceeding Pre-Market High

The second rule is more price-dependent and stringent. A stock must be trading above its pre-market high. This implies that the stock is not only showing strength relative to its daily average (VWAP) but is also gapping up and continuing to build momentum after the market opens. The speaker emphasizes the strictness of this rule, suggesting it’s a key indicator of strong opening interest. The pre-market high acts as a resistance level, and breaking it demonstrates bullish conviction.

Rule 3: Minimum Volume Threshold

The third and final rule concerns volume. The stock must be trading with a minimum of one million shares of volume. This is directly tied to liquidity. The speaker explicitly states that if a stock isn’t achieving this volume, “there’s not enough liquidity.” Insufficient liquidity can lead to slippage (the difference between the expected price of a trade and the price at which the trade is executed) and difficulty exiting a position, particularly for larger trades. A million shares is presented as the minimum acceptable level for reasonable trading.

Logical Connections & Overall Strategy

The three rules are presented as a sequential filter. A stock must pass the first rule (VWAP) to even be considered, then the second (pre-market high), and finally the third (volume). This layered approach aims to identify stocks exhibiting a combination of price momentum and sufficient liquidity to facilitate profitable trading. The strategy prioritizes avoiding illiquid stocks that could trap traders.

Notable Statement

“It’s not doing enough. There’s not enough liquidity.” – This statement, directly attributed to the speaker, underscores the critical importance of volume in small cap trading and the potential risks of trading illiquid stocks.

Conclusion

The core takeaway is a highly specific, rule-based approach to small cap trading. The three rules – trading above VWAP, exceeding the pre-market high, and achieving a minimum volume of one million shares – are presented as essential criteria for identifying potentially profitable trading opportunities while mitigating the risks associated with low liquidity. The strategy emphasizes momentum and the importance of avoiding stocks that lack sufficient trading activity.