How to Find Penny Stocks Pre-Spike (The Secret Formula)

Learning how to find penny stocks to day trade isn’t difficult, but it takes time. I’ve spent decades studying penny stocks and identifying my own chart patterns that allow me to spot my penny stock winners.**

But what if you’re just getting started? Selecting the right penny stocks to watch can seem daunting, but I’ve put together this post to help you learn how to find the best penny stocks to buy — ideally before they explode.

Let’s dig in…

What Is a Penny Stock?

A penny stock is a non-traditional stock that trades off the major exchanges for less than $5 per share.

I usually trade OTC stocks listed on the OTC Markets. But there’s also low-priced stocks listed on the major exchanges like the Nasdaq and NYSE.

How to Pick a Potential Penny Stock Winner Pre-Spike

How do you analyze penny stocks? I use technical analysis — support and resistance levels and patterns on the chart.

If you can read stock charts and find reliable patterns, you can sometimes find penny stocks before they explode. Does it work every time? Of course not.

However, the more you learn and study, the better your penny stock picks can become.

Where to Look for Penny Stocks

You can find penny stocks on the regular stock exchanges and the OTC Markets. Find penny stocks that interest you, then conduct some basic research.

How long has the company been active? What has its previous price movement looked like? Spend time studying those charts.

In many cases, you’re looking for a catalyst, like exciting news about a product or development. These catalysts often precede spikes. When traders figure out that the company might have something going for it, they frequently strike.

Share Price and Valuation

Share price and valuation contribute to a company’s market capitalization or market cap. Penny stocks are typically considered micro-cap, which means they have low valuation. But that’s not a bad thing.

Big-cap stocks are the major companies with huge valuations and high share prices.

Beware Dilution

Dilution occurs when the number of outstanding shares increases. When you’re learning how to find penny stocks, avoid buying or shorting stock in a company that has recently had a number of its options exercised or when lots of shares have just been issued.

How to Pick a Potential Penny Stock Winner Pre-Spike

Traditional stock traders buy low and sell high. My students often take things one step further, both buying low and selling high, and then selling short when prices begin falling and buying to cover.

This can help us make a profit both on the way up and the way down.

In my “How to Make Millions” DVD, I go over my favorite catalysts that can cause stock spikes. If you don’t have the time to do a bunch of research, sign up for my new Supernova Alerts to get alerted to stocks going supernova.

I’ve developed the following rules for finding the best stocks to buy over my 20 years of trading penny stocks. Learn them. Love them. And use them as you work toward being a better penny stock trader…

Rule #1 — Look For Stocks That Are Already Spiking

One of the quickest ways to identify a spike in the making is to start by finding a stock that’s already moving.

With penny stocks, there are a lot of information inefficiencies. So even if you miss the initial news, you might still be able to catch a part of the move.

Rule #2 — Look for Potential Breakouts That Are Reaching New Highs

I look for stocks that can break out to new highs — especially those still up on the day and holding morning highs.

If you see a play like this on a Friday afternoon and the stock’s still holding its morning high, there’s always the potential for a short squeeze into the close. Short squeezes are a play that all penny stock traders need to learn to recognize.

Sometimes, when potential breakouts reach new highs, they can’t maintain their price above the previous resistance level.

Rule #3 — Bet on Price Action

Price action gives you the real story about a stock. Is it breaking out to a new high? Has it crossed its VWAP? All the news sites in the world won’t tell you when these things happen, but a stock’s chart will.

Believe it or not, watching price movements can be educational. It sounds boring, but you’ll start to see patterns you wouldn’t have caught otherwise. Make it into a game. Which way do you think the stock price will move next?

Once you’re confident in your efforts, consider putting money down on your predictions with small positions. Alternatively, try paper trading on StocksToTrade and get a feel for how it works without the financial risk.

Rule #4 — Do Your Research

I hate to say it, but a big reason most penny stock traders fail is because they’re lazy. They don’t want to do the research that my students learn how to do. They want someone to tell them what to do, but that’s not how I teach.

I don’t want to give you fish. I want to teach you how to fish. That way, you can learn how to find penny stocks on your own.

You might know that a particular penny stock has spiked before because of news. You’re pretty sure it’s going to spike, so you go in for several thousand shares.

This is how I profited $4,350 on PRTK on July 29. On the same day, Eastman Kodak Company (Nasdaq: KODK) was going supernova after news of federal funding for developing pharmaceutical ingredients (more on that later). I was looking for sympathy plays.

I remembered Paratek Pharmaceuticals, Inc. (NASDAQ: PRTK) previously had news about federal funding as well. And it had the potential to spike as a lower priced sympathy play.

It had already spiked slightly on increased volume when I bought at $4.67. Then it sped up and was even halted. After the halt I sold at $6.12.

If you want to know how to find the best penny stocks to buy,  remember former runners, news, hot sectors, and sympathy plays.

Success requires hard work and determination. It requires the ability to do what other people won’t do. Proper planning isn’t fun, but it’s necessary.

If you’re willing to take an extra half hour to learn everything you can about a penny stock and the company behind it, you’ll be more informed than most traders.

Learning how to find penny stocks is just the beginning. You also need to know how to analyze them.

Think Like a Retired Trader

If the rules I’ve listed above tell you anything, it should be that I don’t make a move unless there’s a good reason.

That’s why I like to think of myself as a retired trader.

I’m not going to come out of retirement for a so-so trade — just like a retired athlete won’t come back to play for a minor league team. I don’t waste my time, and neither should you.

Thinking like a retired trader can stop you from making emotional plays. You might not have a trade every day, and you can work to avoid falling into the overtrading trap. It’s how traders lose everything they’ve built.

I can teach you these patterns, but I can’t teach you the discipline it takes to be a successful penny stock trader. Only you can do that.

How to Select a Penny Stock Broker

The top penny stock brokers have reasonable fees and better executions. They’re also supportive and provide a user-friendly interface.

What Should You Consider When Picking a Broker?

There are lots of other qualities you need to consider before selecting a penny stock broker. Just as you must do your research to learn how to find penny stocks, you also have to research brokers to figure out what they offer. (For the record, I trade with these brokers.)

Does the Broker Have an Online (and Mobile) Trading Platform?

Find out whether you’ll have access to both an online and mobile version of the broker’s app. That way, if a trade goes against you, you can access your trading account whether you’re sitting at home in your pajamas or lounging by the pool at a hotel in Fiji.

Get a free copy of my book “An American Hedge Fund” to read about the trade I made from a highway rest stop.

When it comes to a broker, also make sure you’re happy with the customer service. This is the company that will be holding your money and responsible for good executions. So when you have a problem, you want to be sure you can get through to someone and have any problems resolved quickly.

Fees

You’ll definitely want to know what you’ll pay for every trade you execute with a broker. Although most brokers have gone to a commission-free structure, you’ll still have fees for locating shares to short, interest on borrowed shares and monthly fees for real-time data.

Make sure you know the costs before you get started.

Broker-Mandated Regulations for Trading Frequency

You probably won’t have to worry about this. Most brokers don’t require a minimum number of trades per month, unless they’re offering a rebate on monthly fees for higher-frequency traders.

If your broker requires you to trade at a certain frequency, bow out. As I mentioned before, you need to think like a required trader. If the stars don’t align, don’t trade.

Minimum Deposit

Many online brokers don’t require a minimum deposit anymore. Of course, you’ll have to fund your brokerage account if you want to trade.

Do your own research on the minimum deposit requirement for the broker you’re interested in. Also remember you’ll be subject to the pattern day trader rule (PDT) if you fund your account with less than $25,000, no matter which broker you use. (Unless it’s offshore, which I don’t recommend).

List of 5 Penny Stocks to Watch in 2020

Below is a list of the best penny stocks to watch in 2020. Some have already had big moves but they can still provide great opportunities for trades on the long and short side.

Kandi Technologies Group, Inc.(NASDAQ: KNDI)

Kandi Technologies Group, Inc. was spiking on July 29 on news about its affordable electric vehicles (EVs).

The EV sector has been hot. Electric car companies and battery manufacturers have been running in sympathy to Tesla’s making new highs.

Eastman Kodak Company (NASDAQ: KODK)

The Eastman Kodak Company started spiking on news that it received a government loan of $765 million to start producing pharmaceutical ingredients.

Some of you might remember that KODK was a camera company … So news of the company getting into pharmaceuticals and seeing a huge price increase looked like a perfect opportunity for short sellers … right?

Over-aggressive short sellers resulted in a giant short squeeze up to $60. Two days prior the stock was trading around $3.

Boxlight Corporation (NASDAQ: BOXL)

Boxlight Corporation is an online education company. It has a range of products for interactive classroom solutions. With the ongoing coronavirus concerns, it’s unknown what schooling will look like in the near future. So people are using more online alternatives.

The company has been releasing news of new products and even a contract extension with Atlanta Public Schools, which brought interest to the stock. But it also announced a public offering of more shares, which resulted in a price drop.

This fall, we could see a renewed interest in the stock.

Blink Charging Co. (NASDAQ: BLNK)

Blink Charging Co. is another hot penny stock to watch from the EV sector. It had a big run and then consolidated for about two weeks. It recently had another breakout to new highs.

Always remember former runners in hot sectors.

Precipio, Inc. (NASDAQ: PRPO)

On July 30, Precipio Inc. announced the commercial launch of its coronavirus antibody test.

The news was released in the morning when the stock price was in the low to mid-$1 range. The stock ended up halted for about three hours and re-opened in the $6 range.

My Favorite Platforms to Trade Penny Stocks

If you’re just learning how to find penny stocks, I recommend StockToTrade.

I might be a little biased (I helped develop the software and I’m an investor), but I think StocksToTrade has more features and benefits than any other trading tool on the planet. You can use it for everything from paper trading to price event alerts.

You’ll have access to more data, better-quality information, and even breaking news with the new Breaking News chat.

If you want to know how to find penny stocks to trade on Robinhood, TD Ameritrade, or E-Trade, check out this post on my favorite brokers.

How to Protect Yourself from Penny Stock Scams

Let’s be honest: Penny stock scams exist. It’s unfortunate because I hear so many stories from new traders about how they lost money buying and holding a stock pump.

Never listen to any stock promoter sending out mass emails about so-called no-risk penny stock picks. Run the other way!

Promoters often inflate a penny stock’s price so they can profit. Nearly everyone else loses because they’re not aware of the scam.

To protect yourself, it’s smart to listen only to people who want to educate you.

Potential Penny Stock Payoffs

Will you get rich tomorrow trading penny stocks? Probably not. But you can potentially develop a system that works for you and builds wealth over time.

I turned just over $12,000 into more than $5.8 million in profits. Some of my top Trading Challenge students have profits well into the seven figures, and many more have six-figure gains.*

But that doesn’t mean everyone finds success. Remember, most traders lose money.

(Please note that these kinds of trading results are not typical. Most traders lose money. It takes years of dedication, hard work, and discipline to learn how to trade, and individual results will vary. Trading is inherently risky. Before making any trades, remember to do your due diligence and never risk more than you can afford to lose.)

Join My Trading Challenge

I can teach you these patterns, but I can’t teach you the discipline it takes to be a successful penny stock trader. Only you can do that.

If you’re ready to give it a shot and put in the time and energy needed to develop a successful mindset, apply for my Trading Challenge today to learn the rules and patterns that could help you pave your way to financial freedom.

Frequently Asked Questions About Finding Penny Stocks

The Bottom Line on How to Find Penny Stocks

Becoming a better trader can involve lots of research and work, but it can also be a lot of fun.

If you learn how to find penny stocks accurately and consistently, you might do well in the market. Over time, if you see profits add up, you’ll find yourself even more motivated to do the research.

What’s your favorite way to find penny stocks to trade? Let me know in the comments … I love to hear from my readers!