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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!

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.

So let’s take a look at 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? 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, spammers and stock promoters 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!

Wow — that’s a another good 50%+ move in a couple days.

Pull that off a few times a year and you will be in great shape.

So, as you can see there are pros and cons to trading lower priced stocks and definitely penny stocks.  It’s not a method I would put all of my equity into — but it’s a viable method nonetheless.

 

Tagged as: Penny Stocks, Trading Strategy