Stock Trading

Penny Stocks — Good or Bad Trading Strategy?

Penny stocks seem to get a bad rap in the market — and I can see why.  Sort of.

Volatility is high, manipulation is rampant, uncertainty abounds, BK’s are everywhere, delistings lurk around every corner.  It’s no wonder that the street’s mantra seems to be:

Stay the eff away from penny stocks!

But if you’ve been trading for any amount of time then no doubt you’ve seen the massive moves that penny stocks can make, and no doubt it got you thinking that maybe you should look further into them.

Now, I can’t say whether penny stocks are right or wrong for you, but what I can tell you is this:

I have been trading penny stocks for the last four years and I wasn’t profitable as a trader until I started doing it.  

And that’s the truth.

Maybe it’s just me.  Maybe penny stocks just suit my personality.  Maybe penny stocks are just better for smaller traders.

I have no idea.

But I like to focus on what works for me.  And I think it’s worth it for you to see if penny stocks might work for you.

So let’s take a closer look and you can decide for yourself…

What are Penny Stocks?

Before we start talking about the pros and cons of trading penny stocks, why don’t I answer exactly what penny stocks are to me and what they are to the market.

To the market, penny stocks are any stock trading below $5 a share.  Obviously that leaves a lot of wiggle room because there are stocks trading at .00001 cents a share and there are stocks trading at $4.99 a share.  No doubt those are two different types of stocks.

I personally view penny stocks as any stock trading between $ .50 and $5 a share on the major exchanges.  That means that I don’t trade any over the counter stocks or pink sheet stocks.  And I don’t trade stocks below $ .50  Why?

Experience.

When you are trading below $ .50 a ton of things can go wrong FAST and while I have made some amazing gains trading stocks below $ .50, I’ve also experienced some HUGE losses.  And in the end, they all washed themselves out.  And in the market you don’t want your losses to wash out your gains.  You want to always keep them fractionally SMALLER than your gains, so that your account can build up.

Now that we’ve got the definition out of the way, let’s take a look at the 3 main things you have to be aware of when trading penny stocks and you can decide for yourself if penny stocks are a good or bad trading strategy.

Volatility

This means that when prices run, they really run. And it’s not uncommon to see 100% gains over a couple days.  Now those are the returns I like to see!

Why so much volatility? Because when you’re down so low, a lot of bad news and market rumors are discounted into the current price. Meaning most of the doom and gloom and scandals and earnings misses have already come up and have already been discussed.  And mod of the traders who are going to sell, have done so already.  Hence the low price.

When you have a situation like this, any good news that comes out on the stock, can send price reeling. If only for a few days.

But trust me, a few days is all you need!  Take a look at the stock chart below.

This is an HOURLY chart!  And in a few days JRCC ran over 75%!  That is an amazing gain in a really short amount of time.  Trust me, you don’t need many of these trades to really push your equity higher.

Unfortunately, to get to these gains, you have to watch out for…

Manipulation

There’s a lot of amateur trading that goes on in the penny stocks.  Because of this, sharks, spammers and stock promoters come in and manipulate prices.

This sucks.  But so what! If you know how to trade, and you know your quit point, and you know not to buy overextended stocks, then finding rampant manipulation — and trading in that direction can result in some great trades.

Of course, sometimes you can get stuck when the party’s over and you don’t call it soon enough — so watch out.  Always be aware of your plan and never get too greedy.

BK’s and Delistings

A BK is when the company your trading goes bankrupt, and yes, these suck.

Overnight your stock can stop trading, and when this happens, you lose all of the equity you have placed in that company.  It’s happened to me twice and it’s a sucky feeling.  But, on the plus side, they don’t happen as often as you might think.

And as long as you don’t load up on any single stock, and you stay away from the sub $1 stocks, then you’re covered.

In Conclusion

Like I said at the beginning of this article, I can’t tell you if trading penny stocks is right for you.  I know that it’s right for me because it works for me.  You have to trade them and decide for yourself.  But the more I look at them, the more I see that penny stocks aren’t good or bad.  They’re just one strategy.

A strategy that produces moves like the one below:

Do you see that?  That’s a 150% gain in just over 2 months.

Do you see it?

 

3 Comments

  1. Mike Conny August 22, 2011
    • davidjohnhall August 22, 2011
  2. Classie Galliher April 6, 2012
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