Everyone wants to choose the best penny stocks … but how can you find them?
After all, there are literally thousands of stocks to choose from, with new ones being listed every day. It’s pretty easy to get overwhelmed. How do you even begin to narrow down the choices for the best penny stocks in 2020?
Ultimately, traders have to develop their own methods for choosing stocks. I’ll be honest: it’s gonna take time, a ton of studying, and plenty of practice. But there’s good news, too…
There are several strategies that can help you kickstart the process of becoming a self-sufficient and savvy penny stock trader.
Wanna learn more? Let’s dig in. Here, we’ll talk about what a penny stock is, how to find good penny stocks, and what to do once you’ve found a potential pick.
Table of Contents
- 1 What Are Penny Stocks?
- 2 Latest Stock Market News
- 3 What Are the Best Penny Stocks to Buy Now?
- 4 How to Find Penny Stocks Before They’re Pumped
- 5 What to Look for in Penny Stocks
- 6 How to Find the Best Penny Stocks in 10 Steps
- 6.1 1. Research the Company
- 6.2 2. Look for Volatility
- 6.3 3. Look for Volume
- 6.4 4. Look for Catalysts
- 6.5 5. Listen to What Others Are Saying
- 6.6 6. Get More Knowledge About Penny Stock Patterns
- 6.7 7. Consider the Time of Day
- 6.8 8. Pay Close Attention to Debt
- 6.9 9. Find Penny Stocks With Favorable Liquidity Ratios
- 6.10 10. Use a Stock Screener
- 7 How to Come Up With a Penny Stocks List – Best Penny Stocks Watchlist
- 8 Key Tips to Develop a Penny Stock Strategy
- 9 The Bottom Line — The Best Penny Stocks
What Are Penny Stocks?
In spite of the name, penny stocks actually refer to stocks that trade for under $5 per share. Some might trade for fractions of a penny. Others cost a few dollars per share.
These are tiny companies with a ton of volatility, low volume, and high risk.
I don’t love risk, but I believe that the potential rewards can make it worthwhile. I’ve been trading low-priced stocks for over 20 years. As a teacher, my goal is to help my students learn the lessons I’ve learned the hard way.
You can be one of my students. Apply for my Trading Challenge now.
Penny stocks work with both traditional buying and selling as well as short selling. But this isn’t position trading. Given the volatility, I typically don’t hold onto a penny stock for very long. Some trades last only minutes. Others might be overnight or longer.
You’ll find penny stocks on the OTCBB and pink sheets. You can trade them through your trading account just like you would any other stock. But you won’t find a big list of penny stocks on the NYSE or other big exchanges.
Latest Stock Market News
News moves stocks. This is true across the board, regardless of whether you trade mega-cap companies or penny stocks.
But in the case of penny stocks, the price swings can be huge. I’m talking prices that can go up 10, 50, even 800 times — and in short time periods.
That means if you’re a smart trader who’s willing to do your own research, you can learn to take advantage of a breakout (or breakdown, on the flip side).
Of course, just because shares are cheaper and you can take a huge position doesn’t mean you should. I’m a big fan of taking small profits and scaling up over time. A slow-but-steady approach can help you stay safe in the long run.
What Are the Best Penny Stocks to Buy Now?
Let me be super clear: you should NEVER follow anyone else’s stock picks. Don’t just blindly trade off of anyone’s “top 10 penny stocks” list or the top penny stocks on Robinhood. Don’t just trade based on anyone’s watchlist — including mine.
Why? Because so many factors go into these choices. You might not understand why the stock is on a watchlist.
And the ‘best penny stocks to buy’ change constantly. Honestly, these stocks can change between the time I write the alert, send it out, and the time you receive and read it. Penny stocks can move fast.
But there’s still value in reviewing watchlists. And that’s why I send one out. I want you to understand the process. So, maybe by reading about the reasons I watch certain stocks, you can pick up tips for making your own stock picks.
I don’t really care about the company Technical Communications Corporation (NASDAQ: TCCO). What I care about is its price action.
This was a short squeeze, and those who shorted big in the $5–$6 range got decimated. That’s a gift for traders like me who went long and took advantage of the ridiculous spike while short-sellers panicked and pushed up the price to over $10.
Considering the day before it was in the $2s, this is pretty astounding. I had plenty of students who took advantage…
… and RocUWorld: “I have learned so much… and was able to predict TCCO before the gap up to 7+”
The company eMagin Corporation (NYSEAMERICAN: EMAN) makes organic light-emitting diode technology. What’s that? No clue. Here’s what I care about: EMAN has a history of spiking big. Like TCCO, EMAN has also spiked near the open and failed very closely.
In a case like this, it’s important to watch a stock closely based on its volume to see what’s in store. And you want to be nimble. In a recent Trading Challenge video, I explained how some stocks are showing signs of the January effect in December.
Profit.ly user MiaPlateau gets it: “January effect can occur in December. Start looking for companies with terrible charts in December for they have potential to be viable trades with the January Effect.”
Ah, good ol’ Virgin Galactic Holdings (NYSE: SPCE). They might say they’re creating commercial spacecrafts, but I’m really just into the charts. This ticker had a nice second-day spike … but personally, I sold too soon.
Ultimately, this was a great potential dip buy into a morning panic. And it gave me a lesson to teach. Part of why I trade is so that I can share EVERY trade publicly and use my experiences to teach my students.
Diffusion Pharmaceuticals (NASDAQ: DFFN) was a spiker that I traded recently. I bought it off of its highs in the low $0.60s, hoping it would break the day highs.
I took a small position and made a small win, but got out fast. I was hoping for a spike but it was having trouble at premarket highs so I took the single and got out so I could make a video to teach from the experience!
I wasn’t the only one who got in on this one. Check out what Profit.ly user Sparrowhawk says:
“It feels good to know I’m on the right track when there’s an alert of a buy that you made and I made the same buy at the same price. Learning to sell sooner so I pushed myself to sell quickly rather than holding too long and losing any profit. Thanks Tim”
Clovis Oncology (NASDAQ: CLVS) could change the world … but in my experience most penny stocks don’t go anywhere in the long run.
But here’s what I do care about: recently, it’s been bouncing off its recent multi-day lows as shorts are covering … so I’m seeing all sorts of setups that could be buys for me.
Profit.ly user Bloodhound profited from the price action and continues to improve by learning from experience:
“thx, Tim! took a little from CLVS but got scared out due to poor action. In @ 10.75 out @ 11.249. As you say, the bounce just didn’t happen as expected. TRYING to practice better habits.”
[Please note that these results aren’t typical. These students put in the time and dedication and have exceptional skills and knowledge. Most traders lose money. Always remember trading is risky … never risk more than you can afford.]
How to Find Penny Stocks Before They’re Pumped
If you want to trade penny stocks, you’ve gotta understand stock pumps.
It plays out like this: a company or promoter hypes up a microcap stock to get as many investors as possible to buy in.
The stock price goes up briefly because of the surge in demand. But the stock’s inflation is artificial. There’s no real reason for the price to go up. So eventually, it plummets back down.
Crappy, right? But as a trader, you can exploit pumps by getting in early. If you spot a potential pump, you can buy in and get out before it spikes then fails. The key is learning how to spot a pump.
One thing to look for? Subtle accumulation. A promoter will begin gathering large positions in the stock, but in small chunks so as not to alert other investors before promoting the stock.
What to Look for in Penny Stocks
What should you look for in potential penny stocks to trade?
Well, it depends.
However, there are a few key steps I take to find strong trades. Let’s discuss…
How to Find the Best Penny Stocks in 10 Steps
These 10 steps are a great starting point for finding strong contenders for penny stocks to trade.
1. Research the Company
An informed trader is a smart trader.
One of the first things to do when deciding on a stock is to give the company in question a quick Google search. No, this won’t give you all the answers. But it can help you determine whether the stock is worth more thorough research.
For example, if the company seems really sketchy … if its website is just a Facebook page and you can’t find a physical address … those could be bad signs.
Pay attention to the Google News tab, too. You can get lots of information quickly about a company based on past news releases and articles.
2. Look for Volatility
When choosing penny stocks, you’ve got to look at the price volatility.
With penny stocks, you’re not looking for slow-moving, months-long uptrends or downtrends. You’re looking for stocks that are rapidly spiking.
The fast-moving stocks are usually the ones that you want to look at as a penny stock trader.
These days, there are some great tools to help you sort through losers and gainers. This can help you establish a starting point for potential trades.
I love using StocksToTrade since you can easily filter on the biggest gainers (or losers).
Think of it this way: If a stock hardly moves at all, there isn’t any activity. You’ll have few buyers and sellers. That means you can’t take a large position — or worse — you might have trouble getting rid of your shares.
Remember, volatility can be a good thing. It means there’s action, whether up or down. And that can potentially get you WAY ahead.
3. Look for Volume
Volatility isn’t the only factor that can help you determine strong choices when choosing good penny stocks. Liquidity matters too. No matter how enticing a company’s press release may look, if there’s not much volume behind it, don’t trade it.
The volume is the number of shares that change hands on a given day. Volume can help you fill in more pieces of the trading puzzle, giving you a more accurate look at the activity and viability of a good penny stock to trade.
Normally, I don’t like trading stocks with under 200,000 shares traded per day. If I want to be conservative, I could go with 500,000 just to be extra safe.
Essentially, high volume means that there’s interest in a stock. When you decide to sell, you probably won’t struggle to find a buyer, and if you want a large position, you can take one.
4. Look for Catalysts
A catalyst is something that precipitates a major event. In the stock market, a catalyst is any news — good or bad — that can move a stock’s price.
For example, say you come across a company press release for Company X announcing a new product release. Even the news of a release could have a major impact on the stock’s value, whether the product’s successful or not.
Other examples of catalysts include mergers, sales, major personnel changes, company scandals … you get the idea.
So if you’re considering a stock, be on the lookout for any catalyst that could give you a good reason to believe that the stock might continue to move.
Over time, by scouting the news for catalysts and watching how they make stocks move, you’ll begin to get a better idea of what to watch for.
5. Listen to What Others Are Saying
It’s good to listen to the buzz on the street about penny stocks. But this advice comes with a HUGE warning…
While it’s OK to check out what people are saying on social media and in chat rooms, take it with a grain of salt. Use it to support the case for your trade — not as a final decision-maker.
You should never blindly follow another penny stock trader or promoter’s lead when it comes time to buy.
In my Trading Challenge, one of the biggest things I aim to teach is how to think for yourself. Learning all you can and observing what works for others isn’t just so you can copy what others are doing…
Instead, you should observe and learn the process. Then use your knowledge to forge your own path and build a trading career that’s authentic and appropriate for you.
6. Get More Knowledge About Penny Stock Patterns
History repeats itself … sort of. In my experience, history never repeats itself to the letter — but it can give you a pretty good indication about how a play might work out.
I typically trade based on the same key patterns. They might morph and change a little, but they stay mostly the same. I like boring but reliable.
I should clarify a point here: I don’t teach patterns so you can memorize them. It’s about understanding them, so that you can anticipate and react to them in the future. When you begin to understand patterns, you’ll see that there are always opportunities.
One of my most successful students, Tim Grittani, is great at identifying patterns…
He’s improved over the years by keeping track of his trades and reviewing them over time. This helps him identify patterns, both in the market and in his own trading. So far, it’s working well for him: to date, he’s made over $8 million in profits!**
7. Consider the Time of Day
It’s important to choose a strategy that works with your schedule.
Here’s the thing: the best stocks to trade can depend on the time of day you’re trading.
For example, while trading during college, my six-figure student Mike Huddie focused on early morning plays so he could trade but still make it to class.
But the time of day can change how you trade. Stocks that make for great morning plays (like this great penny stock pattern) might be total losers later in the trading day.
Curious about the best times to trade? Check out this post.
8. Pay Close Attention to Debt
If a company has a ton of debt, that can be a red flag.
Choosing good penny stocks means looking at a company from all angles, including its financial health.
I mostly rely on technical analysis, but it’s important to take the fundamentals into account, too. So take the time to look at earnings reports and see what’s going on with the company.
Often, this can give you some clues as to the company’s health. If a company is swimming in debt, it’s probably not a good indication of long-term success.
This doesn’t mean you can’t trade the stock, but it might be a cue to adjust your strategy.
9. Find Penny Stocks With Favorable Liquidity Ratios
Every company has assets and debts. The comparison between the two is called the liquidity ratio.
For example, say that a company has $100,000 in debt and $50 million in assets.
Yes, it has debt … but overall, this is a favorable liquidity ratio.
Why? Because the assets outweigh the debts, meaning the company has working capital. In short, they have money to make things happen. This could show that the stock holds promise for future price action.
10. Use a Stock Screener
Why spend unnecessary time filtering down your choices of stocks to trade when there are programs that can help you do it more quickly and easily?
A stock screener can help you narrow down your choices based on the criteria that you set. Stock screeners allow you to search by a number of factors, such as volume, volatility, market capitalization, and more.
It’s no big secret that StocksToTrade is my fave. I helped with the platform’s design. So it’s loaded with features and custom screening tools that help traders like you and me find the best penny stocks.
How to Find Penny Stocks on StocksToTrade
Remember: StocksToTrade isn’t just a stock screener. It’s also a great tool for getting market news, researching a specific company, and looking for chart patterns.
How to Come Up With a Penny Stocks List – Best Penny Stocks Watchlist
A watchlist is a short list of stocks that you’re watching and considering trading. By curating and editing your list on a frequent basis, you’ll always have stocks to watch and research. That means you’ll be ready to pounce if they hit your desired price range.
Want more on what a watchlist is and how to build a solid one? Check out this post.
Key Tips to Develop a Penny Stock Strategy
Every trader needs to have a strategy. To a certain degree, this will develop in time. But to crystallize certain important things, here are a few key tips:
- Respect risk. It’s important to recognize that risk is inherent to trading. Don’t ignore risk — respect it. In fact, I want you to hate risk so much that you’ll do your best to avoid it!
- Consider your goals. Why do you want to trade penny stocks? Be very clear on your personal goals and objectives to help you focus on strategies that will work best for you.
- Start small. Remember: there are no guarantees in trading. NEVER trade more than you can afford to lose.
- Get a mentor. By seeking out a mentor who’s been down this road before you, you can shorten your learning curve. Seeing someone else’s successes and mistakes can help you avoid common pitfalls.
- Don’t force trades. Don’t trade just because you feel like it. Wait for trades that make sense and that work within your established trading plan. When you try to force trades, you’re making the process riskier than it needs to be.
Learn How to Invest With Pros! Join My Trading Challenge
As I’ve mentioned, a mentor can be key in helping you speed up your trading learning curve.
I never had a mentor, and I’ve made plenty of mistakes. And that’s exactly why I’m a teacher and mentor today. I aim to be the kind of mentor I wish I’d had.
I created my Trading Challenge based on my 20+ years of experience in the stock market. I have a huge library of videos, webinars, and an awesome community of like-minded traders to help keep you motivated. And that’s just a few of the perks.
I love helping traders find their stride in the stock market — in a way that’s unique for them. This is NOT a get rich quick scheme. It’s all up to you.
Are you willing to get serious about your trading education and really put in the work? Apply for my Trading Challenge today.
The Bottom Line — The Best Penny Stocks
Trading low-priced stocks is how I became a millionaire, so you could say I’m a fan.**
There’s a lot to love in this niche … Low-priced stocks are more accessible to traders with small accounts, and they have the potential to grow your account fast.
But these stocks come with plenty of risk. You have to build a solid knowledge base, craft a strong strategy, and understand how the penny stock market works.
These are companies with high volume and volatility, so it’s critical to understand what you’re doing before you dive in.
Your first step is to invest in your education account before throwing money at trades. Be better prepared to make smart trading decisions: Start by applying for my Trading Challenge.
[**Note that these results aren’t typical. Do your due diligence on every trade. Most traders lose money. Always remember trading is risky … never risk more than you can afford.]
What’s your personal strategy for finding and trading the best penny stocks? Leave a comment!