This blog is dedicated to teach you how to trade penny stocks. I will post my latest penny stock picks on the main page.
Here’s one penny stocks that I’m watching this week, I will continue to watch it next week and might trade it if I see signs of recovery for this stock. I will discuss my trading strategy later in this post but before we go any further, let’s define what a penny stock is.
What are penny stocks
There are a few different type of penny stocks. Many people consider any stock under $5 as penny stocks where as some consider a penny stocks has to be under $2. These penny stocks are traded on the NASDAQ, NYSE or the AMEX exchange. The other kind of penny stocks are called OTC and Pink Sheet penny stocks where they are traded Over-The-Counter and are extremely risky to trade with. I don’t trade OTC stocks, I only trade penny stocks that are listed on the NASDAQ, NYSE and AMEX exchange. Most of the penny stocks that I’m trading with are under $5.
How to trade penny stocks
Please be aware that there is a difference between trading penny stocks and investing in penny stocks. Investing in penny stocks involves studying a company’s fundamental such as it’s financial statements, products, competitors, leaderships and so on. You are trying to find a valuable company that you can buy and hold for a long period of time, usually over one year.
Most of the penny stocks are cheap for a reason. They are either crappy companies or companies that used to do well, but facing temporary problems. Many of these companies wouldn’t even exists after a few years. The odds of trying to find the next Microsoft from these penny stocks is against you.
On the other hand, trading penny stocks does not care about these fundamental data. We only care about how a stock chart looks like and we buy and sell stocks based on technical analysis. The holding period is much shorter from a few minutes to a few days. The goal is to try to make a profit quickly while reducing risks by not holding a stock for a long time. It is much easier for a penny stock to double or even triple than a stock that is trading at $100 per share. However, the risk is also much higher and most people failed because they don’t take the time to learn how the market works. They trade based on greed, fear and trading tips from gurus instead of learning and improving. Trading takes a lot of discipline, patience, and learning.
Penny stock strategy
Let’s go over the stock ZQK on my watchlist. The stock has been beaten down badly, and it is approaching the previous low or “support” at $0.51. It is currently trading at $0.55. For the stock to go down to $0.51, there is about a 7% risk. If the stock trades above this level next week, there is a chance that the stock might bounce back for a short period of time and I want to take advantage of this bounce back. If the stock continues to go down next week, I will wait and see if the stock breaks the support, if it does, I will not trade it. On the hand, if the stock goes up with strong volume, I will buy the stock and the goal is to make a 5% profit on this one.
Many beginner traders make the mistake of not having an exit plan when they enter a trade. They are going for maximum profit but usually they end up making a winning trade a loser. Here’s what usually happens, assume the stock ZQK does go up next week and a beginner trader makes a nice 10% profit, but he gets greedy and keeps holding the stock hoping for more. Imagine if the stock now drops 5%, the beginner trader starts to regret, and he’s telling himself as soon as the stock goes back up to 10%, he would sell. Unfortunately, many times, the stock never go up again and continues to drop, the beginner’s pain gets bigger and bigger until the fear comes in and sell his stock on a huge loss.
When I first started to trade, I made this kind of mistakes and learn it the hard way. I learn that nobody can predict and time a trade perfectly. Your goal is not to look good, but to perform consistently on your trades. It is much better to have a 5% gain of something than 100% of nothing. You might have a different exist plan, a different target price, that’s fine. The point I’m trying to make is that you need an exit plan before you enter a trade. Discipline is everything in trading penny stocks or any other type of stocks. I will make a more detailed post on this subject in the near future.