Penny Stocks -- Are they a good or bad Trading Strategy?

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

I used to think the same way. But not anymore.

For the last couple years I have done nothing but trade penny stocks (stocks that trade below $5.00 a share). I’ve had good experiences and bad experiences, but overall I have come to see trading penny stocks as a great stock trading strategy and something to keep in my toolbox. Why? For the exact same reasons listed above.

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? Well, because when you’re down so low, the bad news is discounted in. So any good news sends price reeling. If only for a few days. But trust me, a few days is all you need.

Manipulation
There’s a lot of amateur trading that goes on in the penny stocks. Because of this, sharks come in an manipulate prices. 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 — which is exactly what happened to me here. Ouch.

BK’s and Delistings
Okay, these suck. But they don’t happen as often as you might think. And as long as you don’t load up on any single stock then you’re covered.

And, if it all comes together, and you get everything right, then you find a great trade like the one below (I didn’t trade this one, FYI), and all of your hard work pays off!