Trading the Small Caps


Outstanding Shares and Momentum Runs

Most Retail Traders only trade big cap stocks. This is because they depend mostly on news for finding stocks to trade. It can also be due to relying upon Industry or Sector selections, often missing out on the underlying stocks that are moving with momentum but are not a major index component. 

However with the power of Scans, it is easy to find stocks for trading the small caps that are poised to move up with huge momentum gains.

Why trade small caps? Because the spreads are now 5 cents and that provides more liquidity and momentum, as more Professionals are trading small caps due to the new rules for spreads on small cap stocks. This is a recent change to the internal Market Structure that many Retail Traders have not heard about.

Why do small caps have such huge sudden momentum runs? Small caps usually have less oustanding shares than a big cap.

Microsoft Corp. (MSFT: NASDAQ) is a large cap with 7,775 million outstanding shares.  By comparison as an example for trading the small caps, QTNA has 67 million outstanding shares. See the chart example for Quantenna Communications, Inc. (QTNA: NASDAQ) below. 

The candlestick pattern compressed and then moved up 2 days in a row, while the majority of big cap stocks are still stuck in indecisive consolidations.

The higher the number of outstanding shares, the more buyers are needed to move the stock with momentum. With a small cap under Quiet Accumulation, the limited number of outstanding shares can increase momentum exponentially as demand suddenly rises. It does not take nearly as many buyers to create huge momentum. 

Typically the fastest largest runs for Momentum Trading either Intraday or Swing Style, are found in small caps. These gains can often be huge during highly speculative runs. This is due to the limited number of shares available to trade.

When supply is limited, demand increases exponentially and momentum runs occur. The additional benefit of wider spreads draws Professional Traders to these stocks.

During insipid Market Conditions as the markets have had for a few weeks, finding stocks with momentum for Swing or Day Trading can be a challenge. The Dow 30 has been in a very tight formation for several weeks.

With the new wider spreads on small caps, Professional Traders are more inclined to trade these as the gains are higher and the action is faster. 


Scans built around criteria that identify Quiet Accumulation and compression patterns provide excellent stocks to consider during quieter market activity.

Three factors are needed for finding and trading the small cap stocks that will move with momentum during insipid Market Conditions:

  1. Percentage of Shares Held by Institutions needs to be high.
  2. Accumulation by Dark Pools needs to be going on under the radar of High Frequency Traders.
  3. Price patterns that reveal Dark Pool activity.

Trade Wisely,

Martha Stokes CMT

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Martha Stokes
About the author: , CMT, is the CEO of TechniTrader, "The Gold Standard in Stock Market Education." She is a former Buy Side Technical Analyst. Since 1998 she has created over 40 TechniTrader Stock and Option Courses and Classes, for beginner investors and traders to advanced professionals. She specializes in Relational Analysis for Stocks and Options as well as Technical, Fundamental, and Risk Analysis. Her focus for long-term investments is new displacement technologies that will have a significant impact on the stock market.
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