Choosing Penny Stocks
How do you go about choosing penny stocks? After all, there are literally thousands of stocks to choose from, and new ones being listed every day. This has the potential to make you, as a trader, feel totally overwhelmed. So, how do you even start to narrow it down?
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While every trader has to develop his or her own method of choosing stocks — watch my videos HERE and HERE and HERE for examples of various penny stocks setups that have worked well — there are certain tips that can be helpful to traders of all levels. Here are seven things to look for when selecting penny stocks that you might consider in your own trading.
1. Do some basic research on the company. One of the first things you want to do when deciding on a stock is to give the company in question a quick Google search. No, this isn’t going to provide all of the answers. However, quite often this quick and easy step can give you enough information to determine if this stock is worth your time and research.
For instance, if things seem really sketchy and it’s hard to find information on the company in question, this could be a bad sign. Ultimately, it’s your decision to make but start by doing a little research on the company itself to determine a stock’s value.
2. Volatility. One of the next big things you’ll look for when choosing a penny stock is stock price volatility. With penny stocks, you don’t necessarily want stocks that are moving slowly or down-trending for months at a time, rather, you’re looking for stocks that are rapidly spiking. The stocks that are moving quickly are where you can make money as a penny stock trader.
These days, there are plenty of tools by which you can sort big gainers and losers, which can help you establish a good starting point from which to sift through those stocks and decide which ones to buy, but I would use this great tool since no other platform is built specifically for penny stocks and far too many websites and platforms out there ignore some of the biggest % gainers just because they’re low priced stocks…the discrimination is real and while it’s laughable, missing one or two great plays per week or even per day can be the difference between you becoming my next Millionaire student or not.
3. Volume. It’s a common rookie mistake: you get so fixated on looking for stocks that are moving that you neglect to look at volume. This is a huge error and one that can ultimately lose you money. The fact is, volatility is not the only factor that can help you determine strong choices when choosing penny stocks, liquidity matters too and 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 are changing hands under a given day. As a trader, it’s important to begin to piece together the puzzle by looking at movement and volume, which can give you a more accurate look at the activity and viability of a stock to trade, normally I don’t like trading stocks with under 200,000 shares traded per day and if I wanted to be conservative I would go with 500,000 just to be extra-safe.
4. Catalyst. To advance your choice of stocks, be sure to consider a catalyst as well. Once again, a catalyst is what it sounds like: a thing that precipitates an event. In the stock market, a catalyst might be an event or release that is poised to raise the value of a stock.
Let’s offer an example. Say that you read a press release from Penny Stock Company X informing consumers that they are releasing a new product. Potentially, this new release could have a big impact on the value of that stock, so it may be a good time to buy now before it hits the mainstream. A new product is only one example; you might look for mergers, sales, and/or other developments. Being able to scout the news and the world for events can give you insight into what types of catalysts might be worth your while and make a stock worth the investment.
5. What others are saying. Yes indeed, it’s good to listen to the buzz on the street about penny stocks. But let me be completely clear. When I say that it’s good to listen to what others are saying about a particular industry or stock, this doesn’t mean you should ever blindly follow another penny stock trader or promoter’s lead when it comes time to buy.
In the Tim Sykes Millionaire Challenge, one of the biggest things I want to impart is that you need to think for yourself. Learning all you can and observing what works for others is not so that you can copy what others are doing. Rather, it’s by learning and observing that you can begin to forge your own path and create a career as a trader that is authentic and appropriate for you. So yes, look at what others are doing and saying when choosing penny stocks, but ultimately, make decisions based on your own experience.
6. Patterns. It’s commonly stated that history repeats itself. Well, as I have discovered, history never repeats itself to the letter. However, it often gives you very powerful clues as to what may and may not work. For instance, if you have had the experience of trading a stock that you felt really good about where a company had great volume, great movement, and a catalyst but things flopped, there may be aspects of that trade that can inform you in the future. Analyze what works and what doesn’t about trades so that you can make educated decisions about investments in the future. Keep a log of your trades and allow it to help you mitigate risk next time!
My student Tim Grittani, who is one of the biggest success stories from the Tim Sykes Million Challenge Team, is great at identifying patterns. And, for your benefit, he is transparent about his trading. Learn from him and use him as an example of what’s possible for your own trading.**
7. The time of day. Not to explode your mind, but all bets can be off depending on the time of day. Yes, it’s true: The best types of stocks to choose will vary depending on the time of day. The same stocks that make for a great play in the morning might not be the same as mid-day or afternoon; you’ll learn how to tell the difference and what to look for at various times of day and why.
See this great penny stock pattern that I really prefer trading only in the morning.
To a certain degree, this is something that you will learn as you go, but it’s important to know that there are many different variables when choosing penny stocks and that it’s important to always stay on your toes.
Choosing penny stocks depends on a number of different factors. By looking at the elements and attributes listed in this post, you can have a leg up on choosing the best penny stocks to make you money…see this new guide for more details and study up, 90% of traders lose not because they’re dumb or because this is that difficult, it’s due to lack of preparation, so don’t make that mistake!
Which indicator do you like best? Leave a comment below and tell me why!