Trading Penny Stocks: From $583.15 to $100k in 44 Days
One of my early introductions to the stock market was when a friend in high school made tens of thousands of dollars day trading penny stocks over summer break. This would have been around 1999/2000 and at the time trading online with TD 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.
OTC Penny Stocks vs NYSE/NASDAQ Penny Stocks
Many of you have seen the movie Wolf of Wall Street. In that movie, they were trading a lot of penny stocks. The penny stocks they were trading were called the Pink Sheets. These are OTC Penny Stocks, which means they are not listed on the NYSE or NASDAQ exchanges. To be listed on the largest national exchanges you have to be fully transparent about your financials, and your stock must remain above $1.00 per share.
Companies that are not willing or able to provide complete financial documentation, who cannot keep their stock above $1.00 per share, or who are in bankruptcy filings, will trade on the OTC markets. The OTC market is further divided between 4 tiers, and the Pink Sheets are the bottom of the barrel. These stocks are traditionally, the worst of the worst. In order to be successful as a penny stock trader, you need to learn to navigate the waters between the OTC and the NYSE/NASDAQ markets.
The 4 Tiers of Penny Stocks: Redefining “Penny Stocks”
SEC Definition of Penny Stocks (priced between $1.00-$3.00)
Penny Stocks are defined by the SEC as any security issued by a small company that is trading below $5.00 (click here for complete definition). 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 $1-10.00 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.
Just for reference, when I took $583.15 and turned it into over $100k in 44 days, I was primarily trading stocks between $1.00 – $5.00. These stocks all meet the min listing requirements for the exchanges, which is important to me. If I’m putting my hard earned money into a stock, I want to feel confident the company isn’t going to disappear overnight.
Traditional Penny Stocks (Priced between .01 cent and .99 cents)
Traditional Penny Stocks, in my opinion, are stocks priced between 1 cent and 99 cents. They aren’t below 1 cent (if you didn’t already know, stocks can trade at fractions of a penny). It’s not uncommon to see a stock priced between 1 cent and 99 cents that is still listed on the NYSE or NASDAQ. These companies will typically get a letter (which is made public), that they need to meet the listing requirements to have their stock above $1.00 within a certain amount of time. If they do it, the stock remains listed, if they can’t it will be de-listed and move to the OTC market exchange. However, it’s very important to note that stocks that trade above $1.00 will never have a spread less than 1 penny. That means the stock will trade 1.01 x 1.02, or 1.05 by 1.06, but never 1.015 x 1.017 (tens of a penny aren’t allowed).
When a stock trades BELOW $1.00, the stocks will trade down to fractions of a penny. In fact, they trade up to 4 decimal places, which is a thousandth of a penny. That means you will see a stock trade .0115 x .0116. This is why I don’t like trading stocks below $1.00! Trading above $1.00 is so much easier.
Sub Penny Stocks (Priced below 1 penny per share)
Sub-Penny Stocks are stocks that are below 1 penny per share. So that starts at .0099. These will not be NYSE or NASDAQ stocks, so for that reason I wouldn’t trade them. These aren’t particularly noteworthy beyond the fact that the companies aren’t strong enough to even have their stock priced at 1 penny per share.
Trip Zero Stocks (Priced .0001 – .0009)
Trip Zero Stocks are priced with 3 zeros. These are stocks priced between .0001 and .0009 per share.
As you can imagine these stocks after often used as vehicles for manipulation. Each increment the stock moves up is a 100% move versus the entry price of .0001. Many of the “hot penny stock” alerts are on sub penny stocks or trip zero stocks and primarily benefit the people who first bought the stock. If somebody buys 100mil shares at .0001 ($10k) and the stock goes up to .0010 they will sell with $100k in profits. Many of the stock promotion newsletters are sent by people who bought huge positions of these penny stocks.
Beginners Guide to Trading Penny Stocks
Many people would consider becoming a millionaire by day trading Penny Stocks to be 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 day 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.
After about 18 months of trial and error, I realized that there are a handful of stocks everyday that make big moves. The trick is learning to find those stocks BEFORE they make the big move. That became the basis for the momentum day trading strategy that I’m trading today. I apply this to day trading penny stocks & small cap stocks.
How I traded Penny Stocks for +$100k in 44 Days
Are you a Penny Stock Day Trader or a Penny Stocks Investor?
In my experience penny stocks are so volatile, unpredictable, and subject to market manipulation, that being an investor is nearly impossible. You need to have a short term outlook in order to survive, and you need to be one of the first traders to get in and the first traders to get out with profit.
Remember that 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 day trader.
This means I follow a few very specific rules about how to pick stocks and how to trade them. Day Trading Penny Stocks at this point is like riding a bike for me. As this point, I can make $100k in 3 months without breaking a sweat, but remember it took me years to get to this point.
One of my favorite things is working with beginner traders in our Day Trading Courses because I know what it’s like to be brand new to the market! The reason working with beginner traders is so much fun is because I remember what it was like to be a beginner trader.
I consider myself to be no different from beginner traders, the only difference is that I’m a little further down the road to success and I can look back at where you are today and know what it takes to get you to where I am today.
5 Tips to Making A Living Day Trading Penny Stocks
- 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
- 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.
- 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.
- 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. An important rule is that I should never over trade these stocks. For that reason, 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 break-even. 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.
- Making A Living 1 Trade at a Time.
It’s important that I don’t look to hit home runs, to make 10-20k in a single trade. My focus is to 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.
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.
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.