The R/G trade (Red/Green) is made at the moment a stock goes from negative to positive for the day. It is incredibly reliable especially for penny stocks, which move so much based on momentum and emotion. There are a couple characteristics that need to be present for the perfect R/G trade.
1. The stock needs to have had a good green day before (day 1). Sometimes the more the stock was up the day before, the stronger the R/G breakout is. This is because the more a stock is up in one day, the more people will think its a good idea to short it. The more people make the mistake of shorting the stock too early, the better.
2. We need a slight pullback in the morning of day 2. Not too much though. A morning panic of 30% will scare people and ruin a big break out opportunity. Ideally, the slight pullback in the morning will entice more short sellers to enter their position too early.
3. Finally, we need the stock to go green on the day.
IGC was a perfect example of a penny stock (stock under $5) R/G trade. You cannot see it on the chart, but IGC was up about 30% the day before. We saw a slight pull back in the morning before going green on the day and ripping higher for 50% gains. But why does this happen? Emotion....it all comes back fear and greed.
We know traders like to short stocks that are up a lot because they think a pull back is inevitable, and they are usually right. The stock was up 30% from the day before based on the strange news of a new Prime Minister being elected in India. They forgot one thing though and that is news doesn't move stocks, people do.
So.....A lot of people took short positions in IGC near the end of day 1 and beginning of day 2. The stock pulled back in the morning, but not much. Perfect! It quickly gained its footing and made a move towards the opening price. As soon as it went green for the day, people bought IGC based on the breakout and the shorts rushed to cover their short positions. How do people close out (cover) a short position?....they have to buy the stock back. So basically there are a ton of breakout chasers and short coverers all trying to buy the stock at the same time, which propelled IGC to make 50% gains that day.