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Penny Stock Basics

Penny Stocks: 5 Steps To Better Picking

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Written by Timothy Sykes
Updated 1/16/2023 7 min read

Today’s 80-minute video below I answer 30 FAQs/explain all about what makes my trading challenge so special and what exactly is this tool I use every day and why it’s so useful. Please pay attention, as I’m tired of answering these same questions all the time!


I’ll get that video transcribed shortly, since I know how important it is to even my valued deaf students and what I’m about to say next might sound surprising, but stay with me.

The fact is, there’s a good reason why a lot of traders look down on penny stocks. Actually, there are several good reasons. Among them: penny stocks are risky, the market is volatile and there are a lot of shady stock promoters looking to pump and dump. Oh, and let’s not forget: the companies themselves are not always the best.

To tell you the truth, I’m not going to argue any of these points. The thing is, these reasons to avoid the penny stock market are completely valid. The market is volatile. Penny stocks are not for the faint of heart. However, once you begin to learn about penny stocks and how they work, you can devise a system for success. That’s exactly what I did and I’ve now turned $12,415 into $4,500,000+ including plenty of losses along the way.**

So yes, there’s plenty of risk, but there can also be plenty of payoff with penny stocks.

OK, I’ll level with you: there is no way to get it right all of the time with penny stocks. However, by taking certain proactive measures and following these steps, you are far more likely to pick winners when trading penny stocks. Save this guide and refer to it whenever you need a reminder.

1. Learn how penny stocks work. This seems painfully obvious, right? But you’d be amazed by how many people think that just because penny stocks are traded in such small amounts per share, that they don’t need to learn the rules of the stock market before they start trading.  This is a common beginner mistake and, for many, it’s the first and fatal mistake that ends their trading career before it begins.

To learn how to pick winning penny stocks, you have to start at the beginning. Learn how penny stocks work. Read my e-guide, which will give you a great primer on the basics of penny stocking. If you’re ready to get serious about trading, consider joining my Millionaire Challenge, where I go into a lot of detail and specifics about the ins and outs of trading penny stocks.

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2. Think pre-spike. Traditionally, the format goes like so: stock traders look to buy low and sell high. Makes sense, right? But as my students know, you can maximize profits even further by buying low, selling high and then selling short when prices begin to fall. When you work this way, it’s possible to make profits both as the price rises and falls.

However, there’s a catch: you need to identify stocks before they spike. In this way, thinking “pre-spike” can help you choose the most effective and lucrative penny stocks. It can help double your money making potential.

This post details my secret formula for discerning whether or not a stock has spiked or not, with helpful tips that can be applied immediately in your trading.

3. Learn the patterns. Like I said in the video earlier, there is no way that you can be right all the time about penny stocks. But, over my time as a trader, I have identified a number of patterns that can prime you for penny stock success….patterns like this and this and this.

I go into MUCH greater detail in my Millionaire Challenge program.  But, in a nutshell, you can look to the market for specific clues: looking for stocks that have already begun to spike, looking for breakouts that are reaching new heights and taking a long, hard look at the price action.

By learning these patterns and understanding what they mean, you can help yourself choose the best penny stocks possible.

4. Do your research. It’s a cold, hard truth: many penny stock traders don’t succeed because they simply don’t do their research. One of the lessons I drum into my students from the beginning of their studies is that doing your research is a vital step that cannot be skipped.

It can be easy to feel like you’re not taking action or “doing” anything while researching stocks. But that couldn’t be further from the truth. If all you’re doing is depending on the word of others, then your profits can automatically be cut, because you’re just being a lemming. Rather than following the trend, seek to be ahead of the curve. This can help you begin to make profits.

Time and time again, a relatively short amount of time spent on research yields profits, both for me and my students.

When a stock seems to hold promise, don’t just depend on the word of promoters, who have their own agendas and have probably “clued in” countless other traders. Do your own digging. Research the stock’s filing and disclosures and see what’s going on in SEC news. See what is going on with the company and what they have in the works; make sure it is legit.

Often, simply doing your research can assist you in making bigger profits and leaving your competitors in the dust. It makes you an influencer, not a follower.

5. Be prepared. Success calls for hard work. It requires determination. You need to do your research and you need to be methodical. But you also need to be prepared.

In chess, the most successful players are thinking several moves ahead: they have a long-term strategy and plan. This is exactly what you need as a trader. Penny stock traders who are just chasing the profits but aren’t prepared are probably going to bankrupt their portfolios.

While doing your research and being methodical might not be sexy, the money that you can make certainly is exciting.

But I’m not selling a get rich quick solution here; that would be insincere and it probably wouldn’t work. While it is possible to make money quickly, the mentality that you need to have is long term. Proper planning isn’t fun but it is necessary.


I said it at the beginning of this post and I will say it again. Picking a winner every time is simply not possible, in penny stocks, in horse racing, or in any sector of life. However, there are steps that you can take to help ensure success. Follow the tips in this post and it will help you choose more winners over time.

Do you have any favorite tips for choosing a winning penny stock?

How much has this post helped you?

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”