Penny Stock Advice: Six Key Factors To Successful Trading

Success in penny stock trading is less risky when you have the tools ready and available to succeed. It is just that simple. Investors like Warren Buffett, George Soros, Marc Faber, Jim Rogers, and Peter Lynch all put their pants on each morning one leg at a time just like the rest of us. The difference is that they have spent the time necessary to find the tools needed to be the best at their job and have acquired the knowledge necessary to use those tools. The best penny stock advice you will ever get: have the tools needed and the knowledge of how to use them and you too will succeed at trading penny stocks.

Penny Stocks are most often found on the OTC Bulletin Board Exchange. One bit of penny stock advice to consider before you start trading penny stocks is that OTC stocks are much better than pink sheet stocks simply because they have filed their financial information on a timely manner with the SEC. However, there are some pink sheet stocks which also file with the SEC in a timely manner and these should be the exception to consider if you plan to trade pink sheet stocks. NYSE, NASDAQ and NYSE Amex exchange traded penny stocks are also a safe place to start since their volatility can be much less than that of the OTC stocks and pink sheet stocks simply since momentum can build rapidly and gains/losses can sometimes happen within minutes without rhyme or reason.

The best penny stock advice you can get depends on how dedicated you are to yourself. Are you taking penny stock tips off the bathroom stalls, listening in on conversations happening across a crowded bar or are you convinced that with the right penny stock advice, tools, knowledge and practice, you can actually turn a $1,000 into $1,000,000 in 36 trades?

Penny Stock Advice #1: Get a Journal and Write in It

By the time we reached the third grade, our teachers had us writing in a notebook in one way or another. Just because you have your GED, High School Diploma, Associates or Bachelor’s Degree, Masters or PHD, you still will be a better penny stock trader if you take up writing each day in a journal. Those who buy a car and use their journal to write down each time they change the oil, go in for maintenance, replace or rotate the tires and even purchase gasoline that write it down in a journal have better maintained and performing cars than the people who just put the key in and drive. The people who take up the gym for the first time that write down their training plan, actual performance, time started and ended, and write a note about what they did good and could do better ALWAYS see results and maintain a healthy lifestyle long-before the people who go to the gym and just do what they are in the mood to do that particular day.

Purchase a journal of some sort that you can write down your ideas, experiences, times, and moods so that you can review it when needed. Expert traders who started their journal referred to it each and every night before they began researching their trades for the next day. Whether it is reading it each night before you set up your trades for tomorrow, on the weekends, or just put it in the bathroom so you can read it there and getting more production out of sitting on the porcelain throne, write down your penny stock trading notes and experiences in a journal and you will notice the difference it makes in your profits. Most people can’t remember what they had for lunch last Monday so it is unlikely you can remember what attributes contributed to your trades from last Monday as well.

Penny Stock Advice #2: Who are You?

When asking the question “Who are you?” it is a question to yourself that you should ask each and every morning before you even consider trading penny stocks that day. If you don’t know who you are, the stock market is in control of you. Controlling your surroundings is controlling your market. Consider your trading in the stock market as your own storefront. Is it clean, shelves stocked, prices adjusted, rotated stock for the hot items to be within a customer’s reach?

If you can use the following self-examination checklist, you can control your market which trades within the stock market as a whole.

  • What is your bias today? Are you Bullish, Bearish or Range bound?
  • What sectors are you firing on? Every day at least three market sectors are hot.
  • What type of trade setups are working best? Flat-top Breakouts, Bottom Bouncers, Flat Base
    Breakouts or Breakout Pullback to Support Plays?
  • What is your edge today on exploiting market conditions?
  • Do you have 7-8 Hot Setups split between day trades, swing trades, long and shorts?
  • What else have you done to prepare for the day?
  • What Homework has been completed? Did you study the blogs, Run your scans, Finish your readings,
    Update your trade Journal?
  • What’s going on with the positions you currently hold? Do you have updated stops on them and
    Updated Targets?
  • How is your trading platform? Is everything in working order? Have you set up hot keys, alerts,
    charts? Is your charting program, scanners all ready to go?
  • How Do you feel? Are you Hung-over, In a Happy Place, Having Family Troubles, Health Probems?
    All these things will impact your trading.
  • Physically – Are you rested? Have you been exercising?
  • Do you feel confident in your plan of attacks or Do you have Paralysis of analysis? (Many new traders
    can’t compute the dozens of variables and bits of information that are thrown at them)

Penny Stock Advice #3: Understand Stages of a Penny Stock

Every penny stock will go through stages. A classic pump and dump will start out with no volume at all for weeks, months, or sometimes ever at all like you can see with AMWI, NSRS or SNPK. These types of penny stocks are where most people make the biggest mistakes hoping to make a million of their thousand dollar investment and usually wind up leveling up by buying more and cut their profits out by doing so. These pump and dump stocks are easy to identify by reading the disclaimer on the newsletters which are promoting them. Anything over $50,000 in promotional advertising is most likely going to burn you if you look to go long on the stock. Scalp some profits of the momentum if you are disciplined enough to limit your risk but don’t get stuck holding the stock over a weekend period or even overnight in many situations.

Penny Stocks will normally go through 4 stages which you can identify on by viewing a stock chart. The 4 stages of stocks are:

  1. Accumulation,
  2. Run-up,
  3. Distribution,
  4. Run-down

The accumulation stage begins when the relentless selling in a stock subsides in a down-trending period. You can see that there is a slow shift in control as sellers & buyers reach equilibrium in a low volume, low volatility environment.

The run-up period begins when a stock clears the highs of the accumulation period, putting the buyers in the driver seat.  At this point, all levels of supply and resistance are absorbed as new buyers, who are fighting for a limited amount of shares, emerge.   This is the easiest time in the market, even new traders are usually profitable. As trend traders we want to enter stocks as it shows momentum and stay in it as long as its moving  in the direction of that trend, once that slows down or ends we want to cash out as we are swimming against the current.

The distribution period begins when the stock has reached a level that seems to remain relatively flat. Volume remains relatively healthy but stock prices refuse to move in either direction that make a particular buyer or seller have much to gain or lose under the current trend.

The run down is begins when either a stock has had a recent run up where profits are being booked or the company has released news indicating a delay in production or less than expected earnings. It can be severe in some cases but if the stock is worthy of having a healthy investor base and not simply due to promotional hype. Spike in volume which have a negative effect on the stock price are the first indication that the stock is in this stage.

Healthy penny stocks fluctuate between periods of trending and periods of consolidation. Professional penny stock traders will focus on periods where penny stocks are moving in a recognizable direction, up or down. Sideways or consolidation periods are times of indecision and will often be dead money as neither buyers nor sellers are in control.   You will become a more profitable penny stock trader by learning how to recognize these 4 stages. You will learn how to switch your investment style and how to apply it when each stage becomes present. As a penny stock trader, you learn how to adapt and trade within trends.  By learning the 4 stages that each penny stock you are watching or trading is in, you can determine which style of trading to use at that time.

Penny Stock Adivce #4: Cash Preservation

If you approach trading penny stocks like having your wallet hanging out of your pocket on a subway in New York in the 80’s, you’ll understand what Cash Preservation means. Don’t expose yourself to unnecessary risks. As a penny stock trader your number one job is to not avoid risk, but to manage it. Your maximum loss on any trade should never ever be more than 10%.  It is a simple mathematical calculation: The more you lose, the more you must make back to get to the break-even point. Playing catch up automatically puts your thought process into a melt down and eliminates you from seeing the trueness of what is on your computer screen. The following shows you why we never want to lose more than 10% on a single trade:

  • Loss – 10%; Necessary Profit to Breakeven – 11%
  • Loss – 20%; Necessary Profit to Breakeven – 25%
  • Loss – 50%; Necessary Profit to Breakeven – 100%
  • Loss – 77%; Necessary Profit to Breakeven – 352%

Professional penny stock traders will tell you; the best advice you can ever get when trading penny stocks is to always use Stop-Loss Orders. Yeah it might cost you an extra $4-$6 with your online broker but the cost is priceless considering what it could cost you otherwise. Stop-Loss orders are designed specifically to limit a trader’s loss on a position. Setting a stop-loss order for 10% below the price at which you purchase the stock limits your losses to 10%.

If you’re worried that you will get stopped out and the stock runs after you’re out, you can always have a backup strategy in play by having a limit order in place. Some of the professional penny stock traders will have stop-limit orders in place at 5%/10% below the price they purchased the stock at. This way, if the stock drops 5%, they are out, if it drops another 5% from the original price, they are back in but didn’t risk the additional 5% decline in price.

Stop loss orders are a MUST, a REQUIREMENT, a NECESSITY when trading penny stocks. If any advice is worth its weight in gold when seeking penny stock advice, this is it.

Penny Stock Advice #5: Learn Volume Patterns

Penny stocks, as mentioned above, can experience spikes in volume for no apparent reason. Learning volume patterns is extremely critical to becoming a profitable penny stock trader. When analyzing a penny stock, volume is second in importance only to share price.  A chart’s volume can tell you virtually everything about a certain stock.

Professional penny stock traders claim a solid indication that a penny stock will move up is when price and volume increase in tandem – when they make a move together. The Price Volume Tandem Move (PVTM) is a great play to watch out for and track because it almost always indicates that the penny stock has upward pressure.

For a true PVTM play, look for penny stocks that have moved up 25% or more in 5 days or less and have trading volume 100% or more above their normal 10-Day average volume. Most profits made by penny stock traders who regularly screen for penny stocks make the majority of their money here.  The potential entry and exit points are simple: you buy at the open following the trigger day and you hold for your preferred durations, consistent with your risk tolerances, financial strategy, and goals. When a penny stock breaks out on big volume, the first dip will normally be bought up very quickly.

Penny Stock Advice #6: Setting Up Your Exit Strategy – Getting Out with the Most Profit

If you truly want to be successful at trading penny stocks and have a successful low risk high/probability trade, you need

  • a setup,
  • an entry,
  • a proper stop loss,
  • an exit strategy, and
  • a proper target

Without these, there can be no success in trading penny stocks. So, before making a trade on any penny stocks, map it out. Just like a baseball player going to bat against a top-notch pitcher, plan for the fastball but be ready for the curveball and slider as well and see the ball going of the end of your bat into one of the gaps or over the fence. You are less likely to make costly mistakes if you have examined the stock from all angles.

Setting a target price to sell is an important aspect of your plan. Placing the trade is simple to run all the calculations but getting out without getting greedy is the hard part. This is why professional penny stock traders will enter a trade with one of two plans:

Plan a target price and sell at that price and walk away. Most will target somewhere between 15-20%. If you invested $1,000 and stuck to the 20% reinvesting the total sum each time, you would have $1,000,000 after 36 trades.

Set a target price to sell at and re-evaluate the momentum of the stock. Rather than selling the entire position, calculate your risk considering you sold out half the position on a bull-run and adjust your sell orders. Example:

  • Purchased 4,347 shares ABCD.OB @ 0.23 – $1,000 Investment
  • Sold 2,174 shares @ .275 (20%) – $600
  • Sold 1,086 shares @ .300 (30%) – $326
  • Amount at Risk: 1,087 shares (Cost: $74)
    • Paper profit @.300 (30%) – $252 (25.2% Total Gain)
    • Paper profit @.310 (35%) – $263 (26.3% Total Gain)
    • Paper Profit @.460 (100%) – $426 (42.6% Total Gain)

Make a plan, see the plan on paper or on screen and execute it! Having your trade mapped out eliminates the aspect of human emotion interfering with the trade. If anything, Learn the “P” Principle to Trade By:

Proper Prior Planning Prevents Piss Poor Performance

Bottom Line: This is what successful penny stock traders do before every trade: In a journal, write down your reason for entry, entry price, stop level, initial target and the reward to risk ratio. If the ratio is less than 2:1, you must right down the reason you think it’s still a viable trade. The time you take to write it, once your done you might realize you have no trade at all. This will prevent you from making emotional and rash decisions.

If you can use a calculator and a keyboard, you can be a successful penny stock trader. Believe it or not, people make money trading ONLY penny stocks each and every day. The only reason you don’t hear about them is because everyone already knows who Peter Lynch is and no one can stand Timothy Sykes.

Last updated by at .

  Recent Penny Stock News