The 7 Biggest Lies You’ve Been Told About Penny Stock Trading

When you’ve been around the penny stock trading block as long as I have, you get pretty sick and tired of hearing the same lies going around again and again.

While I’m long past the point of falling victim to these schemes, what I hate is that they have the potential to discourage my trading challenge students from getting active with trading – or worse, send them down the wrong path that’s going to waste their time or money.

Don’t fall victim to the lies! Learn the truth by reviewing the following seven biggest lies you’ve been told about penny stock trading:

Lie #1 – You need a huge account to get started

If you’re planning on buying into blue chips, yeah, you’re going to need a serious amount of cash on hand to get started. As I’m writing this, Apple is trading at $128.46. If you wanted to take a worthwhile position with the company, you’d absolutely need tens or even hundreds of thousands of dollars to get started.

But penny stocks are a different breed. If the stocks you’re buying or shorting only trade for a few dollars a share, your small brokerage account will go a lot further. It’s kind of a no-brainer. If you have $1,000 to invest, you’re going to be able to buy a lot more shares of a $1 per share company than one with share prices above $100.

If you don’t have a lot of money to get started with, you can’t let that stop you. I’ve always said that all you need to get started with penny stocks is a brokerage account with as little as $500, an internet connection and some time – and I stand by that.

Don’t believe me? Check out the story of one of my best students – Tim Grittani. He got his start with just $1,500 he managed to scrape together, and now he’s made more than $2.5 million as a trader. This young penny stock trader started with just $2,200 and he’s up to $300,000+ in just a few years.

Download a PDF version of this post.

(PS – I’m looking for my next student to help hit the one-million-dollar mark. Will it be you?)

Lie #2 – You need to learn everything there is to know about trading

If you’ve never traded a single stock before, getting started with penny stocks is probably going to feel overwhelming.

But let me let you in on a little secret…you don’t have to learn everything there is about day trading before you can start being profitable…these free penny stock video lessons will put you on the right track to get started!

My students make money in a number of different ways. Some of them buy pumps, while others short them. Some students trade NASDAQs with momentum, others buy into earnings or contract winners.

Do you have to know how to do all that just to get started? Of course not!

I’m partial to shorting penny stocks (I guess they suit my cynical nature), but my student Tim G. prefers to only play price action. We take completely different approaches, but we still make money – because we know the patterns that make these stocks work.

What I’d recommend is this…Get to know all these different tactics on a basic level. Figure out the basic mechanics of each approach, but then pick the one that makes the most sense to you or appeals to you most. Study only that approach until you feel comfortable enough (and have enough cash on hand) to try mastering another strategy.

Lie #3 – Annual profits of 15-30% are a good goal to aim for

If you talk to any hedge fund or mutual fund manager, they’re going to tell you that earning 15-30% a year is a good goal.

That may be true if you’re dealing with a million dollar portfolio, but it just isn’t going to be enough when you’re dealing with penny stocks.

Let me put a few things in perspective for you…Let’s say you’re starting out with a $5,000 portfolio. Assuming you make no other contributions to your account, it’s going to take you 21 years before your account reaches $1 million in value if you earn a 30% rate of return and 38 years if you “only” hit 15% growth…you’ll be as old as Warren Buffett by the time you’re a millionaire and inflation alone will probably make you middle-class by then!

Oh – and just to put this into context, although the S&P 500 topped 30% returns in 2013, its annualized return between 1926 and 2013 is only about 10%. Since more than nine out of ten professional money managers fail to beat the S&P 500, it’s going to take even longer to turn a tiny account into a million dollar holding through traditional stock market investing.

I don’t know about you, but I don’t want to wait that long!

I want to live the millionaire lifestyle now – not in 40-50 years, when I’m more likely to be stuck in a hospital getting my hips replaced than traveling the world and enjoying life…and I LOVE my trips like these:

When you’re starting with a smaller account, you need bigger wins if you want your portfolio to grow quickly. They don’t have to be huge (my average profit per trade is just $2,000), but they do have to be bigger than what you’ll earn with your average mutual fund or ETF.

Using my strategies, I was able to rack up a 174% return in 2014. Professional money managers will tell you those kinds of returns aren’t possible, but my experiences – and the lifestyle I’m living now – prove them all wrong.

Lie #4 – You have to have a diversified portfolio

When you talk to traditional money managers, another big lie you’ll hear is that you need to diversify your portfolio.

Ok, if you’re socking away $250 a month into a retirement account and hoping that’s going to take care of you when you’re old, you might want to listen to that piece of advice. The last thing you want is to have your portfolio wiped out by a major market dip right before you’re counting on that money to provide you with your only source of income.

(Sound familiar, Great Recession??)

But if you’re on this site in the first place, you’re not thinking about providing yourself with a meager, bare bones salary in retirement. You’re planning on building the kind of generational wealth that’ll leave a legacy for you, your children and even your grandkids.

You can’t apply the kind of wisdom that builds a stable retirement portfolio to your penny stock trades, because the goals of the two are so different. Building real wealth through day trading requires a different set of rules, and one place this comes into play is diversification.

One thing that surprises plenty of people is when I tell them that, when I hold positions in penny stocks, I typically only have shares in one or two companies at a time. Often, I don’t have a single position active at all!

Penny stocks are so volatile that good positions only come around every so often. If I forced myself to hold 15-20 positions – just to be “diversified” – I’d lose huge amounts of money, because there are simply never that many good companies at play at every one time.

Losses early in my trading career taught me how important it is to have a set of rules and stick to them – no matter what. I don’t compromise them to meet some arbitrary standard of diversification, and I recommend you do the same.

Lie #5 – It takes 40-50 years to become a millionaire

This myth should be pretty much busted by now, but let’s review…

If you want to be a millionaire in 40-50 years, take $5,000 and put it into an index fund tracking the S&P 500. Do nothing to the account but wait, and if past return trends hold true in the future, you’ll have your $1 million half a century from now.

Don’t want to wait that long? If you’re starting with a small amount of capital (which I assume you are if you’re thinking about getting into penny stocks), you need to take bolder action.

Bolder doesn’t necessarily mean riskier. Everything I’ve learned about penny stock trading over the past 15 years makes me pretty confident that when I see a setup I’ve dealt with before, I know how to make money on the deal.

Using strategies that take advantage of these patterns makes it possible to become a millionaire in just 4-5 years. Your job can’t do that for you, and neither will traditional “buy and hold” investing approaches.

Obviously, that’s not a guarantee – if you learn from me, but then don’t apply what I teach you, you’re more likely to lose everything than to become a millionaire. But if you’re diligent in applying what you learn to your trading and meticulous about following a plan, this kind of portfolio growth is absolutely possible.

Lie #6 – You have to pick the right stocks every time

Nothing could be further from the truth!

I’d love to tell you that I win every trade I make, but I’d be lying. The reality is that I win closer to three quarters of my trades, and even my best trading challenge students only average a win rate of 62-72 percent…see examples HERE and HERE

The secret to my success isn’t how often I win – it’s that I’ve learned to transform my losses into learning opportunities.

The way I look at it, the market has a tuition. When I have a small loss, that’s the cost I have to pay to learn a valuable lesson to apply to my next trade.

Is it fun? Of course not! I’d love to win 100 percent of my trades, but since that’s pretty much impossible, I’ll settle for taking my wins when I get them and learning what I can from my losses.

Lie #7 – Good traders never lose

See above: good traders who never lose don’t exist!

I hope it doesn’t sound like I’m encouraging you to take losses. I’m all for learning opportunities, but I’m also all for minimizing my losses so that I can keep building my portfolio and enjoying the lifestyle it affords me.

And when it comes down to it, the best tip I can give you is to learn how to cut your losses quickly.

Stock traders can get into all sorts of trouble when they start letting their emotions dictate their trades. You fall in love with a particular company’s story, or you don’t want to take the hit to your ego that comes from admitting you were wrong about a particular stock’s movement.

But that’s trading with your heart, instead of your head.

When you trade with your head, you recognize that it’s all just numbers. And when you see a loss coming, you don’t hold on for emotional reasons – you cut your losses by getting out as quickly as possible.

It’s a rule that’s unfortunately difficult to put into practice in real life, but it’s one that you’ve got to learn. Say it over and over to yourself when you sit down to trade, print it out and put it up by your computer – hell, tattoo it on your arm so that it’s the first thing you see when you wake up.

Learn – and apply – this one rule, and your success as a trader will begin falling into place.

Have another penny stock trading lie to add to this list? Leave it in a comment below!

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