You have been successfully trading these ideas for around 6 years. How are you able to keep investing in these small stocks as your portfolio has grown? I would be concerned about having a small stock move against me and not being able to unload all of my shares in a timely manner.
The simple answer is by studying liquidity on stocks which I trade.
Many traders have never thought through how much liquidity they really need to trade. That is one of the reason there are profitable opportunities for traders who think through the problem and understand how liquidity changes over a life cycle of a stock.
The day to day liquidity in a stock is cyclical. When a stock with low liquidity has catalyst and get discovered by the market, liquidity comes in within days. If you see the earnings breakouts day in and day out, you will see this phenomenon again and again. A stock will be trading minuscule number of shares per day for long time probably months or years and then earning acceleration happens, suddenly liquidity will surge in and the liquidity will persist for weeks or months or years.
Lets look at a stock below:
It had days when it traded 0 shares in 2002. Now if you go back and see earnings data on this stock, you will notice sales and earnings accelerated dramatically in 2003. What happened the stock broke out during earnings season sometime in 2003. Liquidity increased dramatically and persisted. Now it trades thousands of shares per day. Its float has gone up from 9.5 million in 2003 to 12.6 million, but the daily liquidity has never looked back since its earning lead breakout in 2003.
You will notice that on the following monthly chart for DECK:
I can show you hundreds of examples of stocks which were trading minuscule number of shares per day and then a catalyst like earnings or something will appear. There will be "Episodic Pivot" and then liquidity will just explode and persist for months or years.
Look at WFR, which has currently a float of 223 million and trades millions of share per day. The same stock was a neglected stock in 2001-2202 and had days where it traded less than 10000 shares per day, then 2003 onwards earnings and sales accelerated and boom liquidity jumped and it persisted.
Or look at VDSI which had days where it traded less than 3000 shares a day, then earnings accelerated and kaboom liquidity jumped.
If you go through the 100% plus universe and compare the stocks liquidity 1 or 2 years prior to its 100% plus break, in cases after cases you will see the stock was trading minuscule number of shares per day and when it starts moving up liquidity follows. Price growth brings liquidity.
This happens day in and day out in neglected/virgin stocks. Stocks fall in to markets dustbin, liquidity dries up those stocks get neglected for long periods. A catalyst arrives and boom volume and trading liquidity arrives. If you use a liquidity filter set to very high level, like most traders do, you never catch such breaks.
Many traders have set their liquidity filter at such high level that they don't even look at some of the best opportunities in market. So many people use filter like Average Volume for 90 days should be above 500000. The filter ensures that the best opportunities in the market get eliminated.
The implications are clear for someone who studies this in detail and understand it. It can dramatically improve your returns, if you can catch start of a new liquidity cycle. One of the scan idea under neglect which I have used is to find a liquidity break rather than price break. That often signals start of a enduring long term trend. If you are trading short term strategies or day trading understanding the liquidity cycle can help you design so many strategies. Many successful day trading strategies are based on a very simple understanding of these intra day liquidity cycles.
Understanding liquidity cycles can give you confidence to trade small and neglected stocks. If you want to trade earning breakout, it is extremely critical to understand this, the trade works because previous to the earning surprise there was no liquidity. Once you buy liquidity comes in as several others and funds who understand earnings importance join in immediately. The liquidity will persist post the breakout if in market participants collective judgment that stock has long term potential. Management will add liquidity by releasing more shares through secondaries or insider sells or through stock splits.
Within matter of days a small and risky stock with low volume will become a liquid stock with several thousand shares traded per day.Sometime this will happen within minutes of earnings announcement and it will persist for months. That is how liquidity works in market and that is why I am not scared of trading small stocks with big catalyst or big price increase or 100% growth because I know liquidity follows price growth.