Risk Management

5 Tips for Making a Living Trading Penny Stocks

One of my early introductions to the stock market was when a friend in high school made tens of thousands of dollars trading penny stocks over summer break.  This would have been around 1999/2000 and at the time trading online with Ameritrade was still a new concept.  I always knew there was potential to make money in the stock market with a small account but I didn’t know how.  I decided to open my own account but I was trading stocks like CAT, IBM, and AAPL.  With my $1k account I made about $17 dollars.  I was investing in the wrong stocks for big percentage growth.

Becoming a millionaire trading Penny Stocks is the ultimate rags to riches story.  By trading the cheapest stocks on the market you can invest small amounts of money and see huge returns.  But how hard is to make a living trading penny stocks?  It’s actually a lot harder than most would imagine.  The allure of quick returns draws the crowds into the penny stock market, where many end up losing their shirts.  At the end of the day, only 10% of active traders in the market will actually be profitable.  The rest are giving their money away to better traders.

 

Stocks under $5.00 per share are considered Penny Stocks

Penny Stocks are defined by the SEC as any security issued by a small company that is trading below $5.00.  In the past penny stocks used to literally mean stocks trading under $1.00.  Stocks trading under $1.00 were almost always small companies struggling to find their place in the market and as a result those securities were very speculative investments for traders or investors.  In this day and age, securities priced between $1-10.o0 in many cases still represent some of the most speculative and risky investments.  This is especially true for small companies in the Biotech, Internet, and Fintech sectors.  These stocks can come out with news overnight that result in a 50% drop to the downside or a 100% squeeze to the upside.  Anyone investing in these types of securities has to be prepared for the possibility of a total loss.

 

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Are you a Penny Stock Trader or a Penny Stock Investor?

In my experience penny stocks are so volatile, unpredictable, and subject to market manipulation, that being an investor is nearly impossible.  A penny stock company can have a horrible balance sheet, awful fundamentals, and then spike up 200% on breaking news of a new partnership.  For this reason, shorting penny stocks expecting the companies will go bankrupt is extremely risky.  The fundamentals will matter eventually, but in the meantime, most investors can’t handle holding a position down 200%.  I’m a penny stock trader.  This means I follow a few very specific rules about how to pick stocks and how to trade them.

 

5 Tips to Making A Living Trading Penny Stocks

1. Avoid OTC/Pink Sheet listed Penny Stocks.  Companies trading on the OTC (over the counter) market have fewer regulations placed upon them as compared with stocks listed on the NASDAQ and NYSE.  As a result, stocks on the OTC market are highly susceptible to manipulation and fraud.  The only penny stocks I trade are listed on the NYSE or NASDAQ.  I know these companies are facing stricter requirements to maintain compliance

2. Don’t fall for the Promotional Pumps!  Many OTC Penny Stocks become promoted at one point or another.  These promotions often come with messages like “this stock will be the next Apple”.  The reality is, the next Apple is not likely to come from the penny stock world.  It’s more likely the next big tech company will start as a large company that IPO’s well above the penny stock price range, and then continues higher.  When you are buying penny stocks to hold in hopes that it will be the next Apple, you become an investor of one of the most speculative financial instrument on the market.

3. Only Trade Penny Stocks with Volume.  It’s really important to avoid illiquid penny stocks.  Most penny stocks trade only a few thousand shares a day.  However, when a penny stock has breaking news, they will often trade at 40-50x relative volume achieving 5 to 10 million shares of volume on a big day.  These are the days I’ll trade a penny stock.  The good news is that there is a penny stock having a once in a year event almost everyday!  This means as a trader there is almost always something to look at.

4. The Hit and Run Approach.  Once a penny stock has met my standards for being worthy of trading (having news, volume, and being NYSE/NASDAQ listed), I’ll look for one of my Go To setups.  These include Momentum, Gap and Go, and Reversal Trades.  I have a rule to not overtrade these stocks.  I only take the most obvious setups.  I buy in the place where I expect thousands of other traders will also enter.  These entries are based on support and resistance patterns.  Once I have a profit, I sell 1/2 my position and adjust my stop loss to breakeven.  By quickly taking profit and adjust stops, I ensure small winners at the least.  Occasionally I’ll get into a penny stock and get a big winner, but as a trader, I look for many small wins.

5. Making A Living 1 Trade at a Time.  I don’t look to hit home runs, to make 10-20k in a single trade.  I trade penny stocks almost everyday and have a daily goal of $500-1k/day.  That means anywhere from 100-200k in annual profits.  Many small base hits ads up over the course of weeks, months and years.  My focus is making a living by trading, rather than investing in penny stocks.

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Want to learn more?

Many beginner traders start their trading journey with penny stocks.  We actively encourage traders to AVOID penny stocks and instead trader stocks priced between $3-10.00.  These are stocks that have the potential to make 20-30% intraday move, but retain the security of being listed on NYSE and NASDAQ.  As a result, they are more popular among traders and are often considered safer vehicles for trading and investing.  If you want to learn more about the trading strategies I use everyday, check out our Day Trading Courses.  As you probably already know, I’m an active trader of stocks priced between $2-20, and occasionally trading stocks as high as $200.  I trade stocks reporting breaking news such as earnings, contracts, FDA announcements, or other PR’s.  I look for that stock that is having a once a year event because that’s the stock every day trader will be watching.  You can watch me trading everyday in our Day Trading Chat Room.