Penny Stocks

Trading Penny Stocks: Step by Step Guide and +$193k in 12mo

Trading Penny Stocks: Step by Step Guide

 

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 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.

 

 

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.

 

Why Should You Listen to Me?

 

I made $94,119.54 Day Trading Penny Stocks in 3 months

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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.

 

Penny Stocks

 

Are you a Penny Stock Day 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.  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 tot he 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

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.  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 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.  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.

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.  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.

Penny Stocks: +$193k Beginners Penny Stock Trading Strategy (momo)

Penny Stocks: +$193k Beginners Penny Stock Trading Strategy (momo)

When I started trading stocks the first thing I was researching was how day trading penny stocks works.  Since I didn’t have much money, I thought the only way I could make a decent profit was by trading penny stocks.  Soon after visiting a few websites and signing up to newsletters I was getting daily emails for the next “hot” penny stock.  Some of the first trades I took were on penny stock trades priced between 10 and 20 cents per share.  Unfortunately I never found much success trading literal penny stocks (stocks below $1.00).

 

 

In fact, I lost over $15k in just 1 penny stock trade which was a nearly 80% trading loss.  It was the biggest percentages loss and 2nd biggest dollar loss I have ever experienced in my career as a trader.  During my first 18 months of trading the markets I lost over $30k in rookie mistakes.  I got burned because I didn’t understand how to identify good penny stocks to trade.

If I had been lucky enough get some basic training before I started, my first 18 months could have been completely different.  I might have been able to save myself tens of thousands of dollars in losses, and I likely would have been able to make a full-time living a day trader much sooner.  Although I can’t time travel back and make my learning curve faster, I can share my tips with you today!  These tips are based on my track record of trading penny stocks.

2016 Trading Profits

As of the time I’m writing this blog, I’m up over $193k this year trading penny stocks 2hrs/day.  I have been able to achieve financial security, pay off all my debts, and now I live the life I’ve always wanted.   Today I’m going to share my trading strategies with you and teach you how I find penny stocks to watch.  Instead of trying to gamble with your life savings, I’ll show you the strategies I use to generate consistent profits in the market.

 

Why Should You Listen To Me?

I made $94,119.54 Day Trading Penny Stocks in 3 months

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Penny Stocks are Stocks Trading Under $5.00

Before going any further, I want to make sure we are all on the same page regarding the definition of penny stocks.  According to the Securities and Exchange Commission (SEC), Penny Stocks are defined as stocks trading under $5.00 per share (see definition here).  Most penny stocks trade on the Over-The-Counter Bulletin Board (OTC) exchange, meaning they are not listed on NYSE or NASDAQ stock exchanges, but still are required to file with the SEC.

As you can imagine, getting listed on NYSE or NASDAQ is a process filled with tremendous amounts regulation and financial oversight.  If a stock listed on NYSE or NASDAQ exchanges fails to maintain compliance, they can face delisting and be moved to the OTC exchange.  Other stocks may never be able to achieve NYSE or NASDAQ listing, and instead trade solely on the OTC exchange.

Investors Should be Cautious

Investors should be aware of four cautions.

First, most OTC stocks do not meet the minimum requirements for most exchanges and do not file with the SEC. Therefore, credible and reliable fundamental data are not available for analysis.

Second, historically Pink Sheets stocks are penny stocks and are often near-insolvent companies.

Third, some stocks are illegitimate shell companies set up to scam investors by issuing press releases, and having “analysts” promote the stock and issue more worthless shares. Fourth, Pink Sheets only has one requirement for a company to list – a company needs to have one market maker quoting its stock. The listing companies do not have to provide any financial information at all. – Investopedia

momentum day trading risk managementProfit Loss Ratios Graph.  Understand your odds for success!

If the OTC exchange is 1 step below the NYSE or NASDAQ exchanges, then the Pink Sheets are 1 step below the OTC exchange.  Pink sheet penny stocks are at the bottom of the barrel, the end of the road, the lowest of the low.  These are, generally speaking, the worst stocks on the market.  This may be because Pink Sheet listed companies face no requirements to be listed.  The means almost any company could become a pink sheet penny stock.  These are the stocks that are usually subject to penny stock promotion.  This is when the company or a group of traders pay for a stock awareness agency to promote their company.

Once the price goes up, they sell and take profits.  This is manipulation and it’s illegal.  There are traders who even while knowing the stock is being manipulated will still attempt to profit from the volatility.  There is a high level of risk here because the SEC can halt these stocks at any time pending investigation.  During a stock halt you can’t buy or sell.  You are stuck.  By the time the stock resumes trading the promoters will have likely taken their profits and those still holding the stocks will be beginner traders (I was one of them on more than 1 occasion).

If you want to trade penny stocks, you have to do it the RIGHT WAY, and that means avoiding the Pink Sheets.

 

Warrior Trading Case Study

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Trading Penny Stocks on the OTC Exchange

Many traders who don’t feel comfortable trading pink sheet stocks will still trade penny stocks on the OTC exchange.  I personally don’t.  I have a three distinctive problems with trading on the OTC Exchange.

OTC Exchange & Poor Liquidity

The first is liquidity.  Most OTC stocks are very thinly traded, meaning there will be big spreads between the bid price and the ask price.  It wouldn’t be uncommon to see a stock quoted at 3.00 x 3.60.  That means there is more than 20% in the spread.  If you buy on the ask, you are immediately down 20% if you sell on the bid.  This type of spread stacks the cards against you and makes it harder to be profitable.

According to the SEC, “Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price” (SEC).  Lack of trading volume is what causes the liquidity issues and creates the large spreads and difficulty buying and selling.

OTC Exchange & Poor Execution Speed

My second issue with OTC stocks are the execution speeds.  With NYSE and NASDAQ listed stocks execution speeds are typically 1 second or faster.  With OTC stocks, the executions can take as long as 10-15min for orders to fill.  This is especially true when tens of thousands of traders are all trading the stock at the same time.  The result is that by the time your order goes through, the price could be dramatically different from when you first placed order.

This level of risk in acceptable for me.  In the chart below you can see a OTC Penny Stock $FNMA (OTC) that surged up from $2.50 to $3.25 for a 30% intraday move.  The momentum suddenly shifted at the top and buyers who entered too high would have been trapped, and may have had to wait some time before their executions went through and they were able to exit positions.  Over the course of 15min the price dropped from $3.25 back down to $2.80.

OTC Exchange & Pink Sheet Stocks

My third problem with trading OTC stocks is that like pink sheets, they remain high susceptible to stock promoters and manipulation.  This means when the price starts surging up instead of being the result of truly good news, such as a cure to a disease, the catalyst is that fake news may have been circulated by promoters.

Those same promoters will sell the stock  once the buying begins.  Instead of the supply and demand equation where we have tons of demand and very little supply, those promoters will create supply by selling their shares.  This reduces the likelihood of seeing a good trade for regular traders like myself.

As a trader, my job is to manage risk on every trade I take.  I manage risk my avoiding Pink Sheet and OTC penny stocks, and instead focus on trading NYSE and NASDAQ listed penny stocks.

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My Step by Step Guide to Profitably Trading Penny Stocks

Before talking about my trading strategies I wanted to first discuss the risk.  Trading penny stocks does carry far more risk than almost any other type of investment.  This risk is multiplied on OTC and Pink Sheet stocks, but is less on NYSE and NASDAQ stocks.  I have been able to make a good living trading penny stocks and stocks priced between $5-10.00.  I focus on a very specific set of criteria for how I determine penny stocks to watch.  This helps me reduce my risk and increase my profit potential as a trader.

The second step to risk management has been to day trade penny stocks instead of investing.  I don’t hold stocks overnight.  I look for penny stocks with the potential to move 20-30% in a single day, and then take as much as I’m able to get before the market closes at 4pm.  When you hold stocks overnight you are exposed to the risk that news could come out overnight and the stock will open tomorrow at a much different price.  This happen often with penny stocks as they are some of the most volatile stocks in the market.

 

Step 1: Trade the Best and Leave the Rest

The first and most important concept to understand is that to be successful as a trader you have to focus on only trading the best quality setups.  As a beginner traders it’s almost impossible to separate good quality from bad quality setups.  That’s why I’m going to give you my criteria for finding stocks with home run potential.  I use Stock Scanners to find all of my penny stocks to watch.  This makes it extremely easy for me.  I have programmed these scanners to only look for penny stocks that match the criteria below.  Each morning I will have a list of stocks I can potentially trade.

Criteria #1: Stocks must be priced under $10 per share.

Criteria #2: Stocks must have a Float (see float definition) of under 100mil shares.

Criteria #3: Stock must have above average relative volume (You can find this using Stock Scanners).  This means lots of traders are already starting to buy shares and volume is increasing.

Criteria #4: Stocks must already have started moving up quickly, I usually trade stocks up 10%+ or more with goal of capturing 10-20% of profit.

Criteria #5: Stocks must have REAL news.  This is in contrast to fake news put out by promoters.  We can find news on Stocktwits, Market Watch, Benzinga, or right in our Day Trading Chat Room.

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Step 2: Trade the Best Quality Setups

Step 1 is to trade the best quality stocks.  Step 2 is to trade the best quality setups.  We are going to keep with the theme of Trade the Best and Leave the Rest.  The best quality setups are simple Bull Flag or Flat Top Breakout patterns.  These chart patterns are what professional traders use to enter a strong stock with a minimal level of risk.  Both of these patterns share some common characteristics.  They both first require a stock to have made a big move up, then pullback with a brief sell off.

At the bottom of the sell off traders take their entry for the first candle to make a new high.  This pattern is incredible predictable, and is outlined in great detail as part of my Momentum Trading Strategy.  Remember, these patterns are only valid on the best quality stocks.  These patterns are meaningless when they occur in indices, EFTs, or stocks that don’t have high relative volume.  If you are ever in doubt, ask yourself if the stock you are planning to trade is having a once in a year type of event.

 

 

On the Bull Flag candle stick chart pattern, the entry is the first candle to make a new high after the pullback. In the live trading example above, you can see how I took my entry looking for a big move. I was up $2k, but was looking for $4-6k profits. I stopped out with a small winner. None the less, this was just one of many opportunities I trade each day.  I find these stocks on my stock scanners, then wait for the first pullback.  Often times I can take an entry after the first pullback and still capture a 10%+ move.  In our Day Trading Chat Room, I call out each of these trades in real-time so our students can see what I’m trading.

 

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Penny Stock Trading Strategies Pattern #1: Bull Flags

blog_flattopbreakoutPenny Stock Trading Strategies Pattern #2: Flat Top Breakout

 

Step 3: Join me and the other Traders in our Chat Room

If you want to be one of the best, you have to surround yourself with the best!  In our Day Trading Chat Room we have over 2000 active traders exchanging ideas, posting trade alerts, and announcing breaking news.  With this many traders in 1 room it’s hard for a stock to start squeezing up without one of us seeing it.  We tackle the market each day a team.  I’ve learned that when you trade with a team, you trade with confidence.  Below is a screen shot from a day we traded $SGOC (NASDAQ) on a nearly 100% intraday move.

We alerted the stock at $3.50 and over the next 15 minutes enjoyed the quick move to $6.00.  This represented an opportunity in the market.  The only question is whether or not traders have learned the skill to capitalize on these opportunities.  On this particular day, over 80% of the traders in our community booked profits on this trade.  My goal is to find 2-3 opportunities like this each day to present to our students and chat room members.  So far this year I’ve booked $180k trading penny stocks 2hrs/day.

This simple strategy has put me in the top 5% income bracket and given me a sense of financial freedom I never imagined I’d have.  I have achieved success thanks to penny stocks.

If you have any questions please email me ross@warriortrading.com.  I get hundreds of emails everyday but I make a point of replying to each one!

 

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