By L.A. Little of, author of Trade Like the Little Guy.

Most of the names we've looked at over the past few weeks have been large-cap names. But there are a host of companies that trade in the micro- to small-capitalization area of the market and these companies offer great opportunities if you recognize the risks inherent to them and take steps to protect yourself.

For example, most micro- and small-cap names have high beta values, meaning the equity price moves around a lot more than the general market. Volatility isn't a bad thing in and of itself, but it cuts both ways. Another problem with smaller companies is that they typically do not have a significant amount of institutional sponsorship nor do they trade a large number of shares on a daily basis. This leads to large bid/ask spreads.

To trade smaller stock issues that share these traits, you have to do two things. First, you have to trade smaller. If your normal trade size is 4% of your overall portfolio, then you have to cut it down to 1% or 2% when trading one of these issues.

Secondly, you have to be able to withstand large swings in price and use that as an opportunity, not a failure. To do so implies that you will scale into and out of your positions always making purchase and sells at the extremes.

So let's take a look at one of these names where opportunity is abundant on the long side of the equation. Bofi Holding ( BOFI) is a consumer-focused, FDIC-insured, nationwide savings bank that primarily operates over the Internet.

Let's start with the long-term time frame at which we can see that BOFI is in a confirmed uptrend (see monthly chart above).

If there is anything to worry about in the long term, it is that the uptrend channel is rather steep, and a breakout of that channel should lead to a nice-sized correction when it finally occurs on a closing basis.

Switching to the intermediate-term time frame, we can see that the current uptrend is suspect and that a retrace to the breakout area is needed.

This is currently occurring and it looks like it will be completed this week.

Flipping to the short term, we can see that what needs to happen on the retrace is occurring -- volume is light as price retraces.

The two buy zones are shown on this chart, the first of which is within striking distance. I would look to start some small purchases around the $9 price level with the idea of buying on a further retrace short term. You do have to protect your holdings under the $8 level (take partial losses) because if prices retrace that far then the $6.75 to $7 level is likely to be hit. There's no need to hold all the shares on a retrace that deep if it was to come about, but do note that a retrace to that level is possible and would be a normal correction on a long-term basis if it was to occur.

Lastly, note the high volume spike high on the daily chart. Highs like those have a way of getting retested. That's the target on the upside and it is also why this stock holds such promise. The reward-to-risk is quite enticing. Just recognize that you have to trade these small stocks slightly differently.

So, until next time, keep trading the charts!

Please note that due to factors including low market capitalization and/or insufficient public float, we consider BOFI to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Little had no positions in the stocks mentioned.
At the time of publication, Little was long BOFI.

L.A. Little is an author, professional trader and money manager who writes daily on, a free educational site for traders and investors. He has been featured in Stocks & Commodities magazine and is the author of Trade Like The Little Guy.