Penny Stock Trading Rules
Finally: Penny Stock Trading Rules. Now that you know what to look for when it comes to evaluating penny stocks and how to trade them, I want to share a few of the rules I’ve developed over my many years as an active trader. These rules guide every decision I make, from what I think of a particular stock to how and when I decide to take a position.
You might decide to come up with your own rules as you get more experienced, but when you’re first starting out, following these rules will protect you from the kinds of huge losses that can wipe out an amateur trader’s entire account.
I’ll cover them briefly first, then expand on how I learned each one later on in this chapter:
Tim’s Rules for Playing Penny Stocks
- Be nimble. Since expectations can change so fast, you have to stay nimble. You have to preserve your capital so that you can take advantage of these shifts when they occur. Forget about being diversified—you don’t necessarily need that. I know you’ve been taught that since day one, but try to de-learn it for pennystocking purposes.
- Be conservative. Never risk too much of your capital in any one play. I’ve lost as much as $500,000 dollars on one stock, and it hurt. I want to save you from that hurt, so you have to trust me on this one. Just be conservative. Never put 100% of your portfolio into a single position, and never hold more than 50% of a company’s daily shares traded. More importantly no matter what percent of assets used, always follow rule #1: cut losses quickly. Keep losses small so you don’t make the #1 mistake people make: hoping for comebacks. Sometimes comebacks happen but why EVER risk disaster? If you’re right about a stock, the price action should show it quickly.
- Be thorough. There’s so much information out there. Yes, it’s a simple market, but there’s still a lot of information. You have to research every potential lead. Most of it, granted, is random noise, but if you skip over the research part, you risk missing an important piece of the puzzle. The greater understanding of each play you have, the greater your odds of success. That’s what it’s all about—you have to give yourself the best chance.
- Always monitor the overall market. Three out of 4 stocks follow the overall market, and penny stocks are no different. They’re a little more independent, but not by much. The overall market does matter, and you need to know which way it’s heading.
- Don’t overextend yourself. It surprises a lot of people, but I never take on more than 2-4 positions at a time. Usually, I only take one position. And again, I’m not risking a big piece of my capital—I’m risking maybe 5% or 10% of my capital every time I trade. There just aren’t that many good setups out there. Don’t rush things or try to push trades that aren’t there. Be patient and wait for the patterns you know to appear.
- Be able to go long or short. This is so key. Stock trading is like a pendulum—some stocks go up and some stocks go down. You need to be able to go either way. Momentum swings both ways, so if you can go both ways and can profit from either direction, you’re a lot better off. You don’t have to bullish all the time or bearish all the time, because you don’t care as long. As the market moves one way or the other you’re set.
- Take your losses quickly. No matter how much research you do, sometimes, you’re just going to be wrong. Everybody is wrong from time to time, but the question is, can you admit it? Can you learn from your mistakes and move on? If you can, you’ll take your losses quickly and save yourself a lot of money in the long-run.
- Take your gains quickly. Why do people say to ride your gains? Forget that—this is pennystocking. You need to make money, and then you need to get out. These stocks are so volatile that you’re not investing, you’re pennystocking. You ride the price momentum as long as you feel comfortable, but remember that it’s better to exit too early than too late.
- Learn about the companies. You must consider all the variables because while it’s nice to focus just on the charts, companies are living, breathing creatures that influence the charts too.
- Simple is beautiful. There are so many different technical patterns out there that I can’t even come close to listing them all in this guide—I can’t even keep track of them all myself. For the most part, stick to buying stocks that are making higher highs and short selling stocks that are making lower lows. I’m not inventing anything new here—I’m just using this stuff and telling you the basics.
- Don’t discriminate. Discrimination is bad. Be willing to trade any company and any industry. If you wait around for the perfect healthcare startup or technology penny stock, you’re going to miss out on great opportunities in other industries. The one exception is the oil and gas industries, which have unique qualities. You can’t rely on the charts alone for oil and gas plays because they’re tied to the commodity price. So understand that and exercise caution with these companies.
- Aim to profit 50 cents to $2 dollars a share. Since these are penny stocks, we’re trading stocks between $1 dollars and $5 dollars a share. Sometimes, they go up to $10 dollars, but this is the exception—rather than the rule. Instead of betting whether or not a company’s going to double, you’re just trying to make 5% or 10% on your investment and then move on. Don’t try to aim for huge price gains of $5 dollars to $10 dollars a share. Instead, focus on taking solid profits from solid patterns. It’s very nice and easy. This doesn’t apply to lower priced stocks so for stocks under $1-2/share, aim to make 15-30% on your money even though thats a lower centers per share profit number.
- Take comfort in your ability to play. Remember that 90% of traders lose money and give up. Forget that. I can’t even imagine that. I don’t know how I’ve stayed in the game this long, but I have. I’ve stayed in the game at all costs and I continue to learn.
- Think of yourself as a retired trader. Only trade and “come out of retirement” when a play is so good, long or short, that you’d feel guilty missing it. Obviously you’re not a retired trader, but having this mentality of NOT HAVING TO TRADE keeps you from making bad trades/scalping. Far too many traders are addicted to gambling and wanting “action” to feel an adrenaline rush, not solely for the profits they should be focused on
Even when I’m down, I’m not out—I’m still in the game. There’s always going to be more opportunities, but if you can’t survive—if you don’t have capital to stay in the game—you can’t win. So stay in the game and give yourself that chance to win—even if you might not necessarily win every time.
So what can you learn from me? Tons! I’ve had both gains and losses, and I think you can learn from them both. But just to keep things positive, I’ll start out with some of the lessons I’ve learned from my big wins…
LESSONS FROM WINNING BIG
Throughout this guide, I’ve talked a lot about winning at penny stocks by taking the small, incremental wins over big risks. So it might surprise you to hear me say that one of the best things I’ve ever done is be aggressive. Trading is risky—but so is life! Sometimes you just have to be smart, gain as much knowledge as possible, and go for it.
I’m so sick of everyone saying trading is risky and that you shouldn’t ever risk your money. Let’s compare trading to opening a restaurant or a bar. Nearly all new restaurants close during their first year of operation, and 70% of those that make it past the first year close during the next 3-5 years. Their investors lose hundreds of thousands or even millions of dollars, but nobody ever tells them not to invest in restaurants because they’re too risky. It’s madness! Trading is risky, but I was up 174% in 2014. Is that really so bad?
Maybe I’m lucky. Maybe I’m a natural trader. I don’t know. There’s not enough information out there about other traders, so we don’t know. I’m probably one of the first ones out there to say “take it all.” You can look through my audits on Profit.ly. You can look at everything. If I can do it, you absolutely can too.
Another important lesson I’ve learned is to never stop learning. Surprise! Learning isn’t easy, but without it, failing is. You have to learn from your mistakes. If you don’t, you can’t pick yourself up. You’ll say, “Oh, I made a mistake. I’ll never do that again.” But if you don’t detail it and you don’t work it out in your head, you’re never going to be able to improve on it.
Another great piece of advice I can give you is to respect earnings movers. Don’t short sell into big earnings movers, because any sign that a penny stock actually possesses business fundamentals means that their stock price will be hot. I don’t know how to make it any clearer than that. I love short selling into these supernovas. I love those supernovas. But you can’t short sell into something with an actual business.
When a company reports massive earnings, it deserves to move higher, because now the company is being valued based on its fundamentals. Respect its earnings and respect the FDA. Say, for example, a pharmaceutical company gets a new drug approved. It may not have earnings immediately, but it’s always possible that the drug could go on to be a success.
Instead, short sell into hype based on historical price action. You have to learn how to recognize the kind of news that reeks of hype, as this can only influence stock prices for so long. Now that you’ve seen some great examples of historical price action and some of the historical price patterns that I use to profit, you know how to play different charts and patterns. That’s what it’s all about—looking at the past to better play the future.
At the same time, ignore stocks that aren’t in play. I don’t care how amazing a company is, if nobody notices it, you can’t profit from it. Wait for action. There are so many companies out there that have great products, but their stocks don’t move, making them pretty much irrelevant to you. It doesn’t matter if you like the company, if you agree with their technology, or if you agree with their CEOs, don’t bias yourself. Focus only on how the stock trades and you’ll be much better off.
Keep things simple. Buy breakouts. Sell short breakdowns. Ignore all the fancy indicators. There are so many different indicators out there that you can use—the Fibonacci, Bollinger bands, etc. I never use any of that. Instead, I look at what the technical indicators are saying. It can be complicated—and it can take years to really master—but if you spend that time focusing on buying breakouts and selling short breakdowns, you’ll have made money. So always keep learning in the background, but keep it simple. The simple stuff works.
Don’t scalp. Scalping is basically the art of trying to make $0.05, $0.10, or $0.20 a share each trade. It’s just impossible. You might make 50 successful trades at $0.10 each—maybe making $500 dollars each time—and then one scalp trade goes incredibly long and you lose all your profits and more. You’re back at square one and you’ve got to do 50 more over again.
There’s just no good way to make consistent profits from scalping. Instead try to profit from multi-day setups—not the less predictable intraday moves. It might feel good to make money every single day, but don’t give into that crutch. I’ve given in way too many times and it’s cost me big, both in terms of missed opportunities and the overspending that results from thinking you’re some hot shot that makes thousands of dollars a day.
Wait for your variables to align before you enter your trade. Wait for resistance or support to crack. Don’t play guessing games. Don’t try to enter too early and make up the extra, because your odds of success will plummet. Wait for the stock to prove that it’s a worthy. A lot of people—including me—enter too early because we think, “I know this stock is performing well. It’s going to break through support,” or, “It’s going to break through the resistance,” and it just doesn’t.
There’s a reason why there’s resistance and support. These are price areas where you can’t try to predict whether the breakout will occur. You have to wait for the breakout or the breakdown to occur—only then should you enter.
Research like crazy. All the information you need is just freely available on the Internet. Sometimes, you have to pay some money for a DVD or training course, but take advantage of these opportunities to get whatever information you can. Research. It’s going to take time, but the more you study and the more you invest in yourself, the better you’ll understand pennystocking and the more likely you’ll be to profit from it.
Finally, do what you love. If you love what you’re doing, it will show. When you watch my videos, look at the sparkle in my eyes. I love this stuff! I love helping people! I hope it shows, and I hope you come to love pennystocking as much as I do. I hope you find yourself getting excited by the process of researching stocks and uncovering hidden treasures. And I hope you come to love the thrill of timing a play right or seeing a supernova in action. If you don’t ever feel that rush of excitement, your time is better spent elsewhere working on something you truly love.
LEARN FROM MY MISTAKES
I wish I could tell you that every move I’ve made as a trader was perfect, but I can’t. I’ve taken my losses, just like the next guy.
But the thing is, I don’t see these losses as a bad thing. Sure, they’re not fun, but they’re also the best way to get better as a trader.
Of course, you shouldn’t make mistakes if you don’t have to. That’d just be stupid! Instead, I want you to learn from the mistakes I’ve made in the past. Use all of the following lessons I’ve learned to save yourself time and money.
Here’s a big one to start with—learn to take your losses when they’re small. This isn’t a huge mistake for me because I’ve been somewhat successful with this, but it is a big one for me in terms of some of the losses that I let grow because I was too bull-headed to pull the trigger. Just don’t. It’s not fun, but small losses hurt a lot less than big ones. Admit that you were wrong, get out, and just move on.
Here’s another good one—use stop-losses. If you aren’t good at cutting your losses yourself, these orders will make sure you get out quickly. Obviously, these stocks are volatile, but if you’re going to keep your losses small—if you’re going to make sure you keep your losses small—then put in a stop-loss. Some people recommend that you put a stop-loss when you have a loss of 5% to 10%. You might want to go a little riskier, but never let your losses grow to 50% or 70%.
I don’t use automatic stop loss marker because makers can see your orders and move the price to that level, then back up just to take you out and earn commissions. I use mental stop losses so market makers can’t see my “say uncle” point and I still get out if and when the stock reaches that point—but you have to be disciplined and stick to mental stop losses if you’re going to use this more effective tactic.
It’s also important that you learn to stick to your discipline. It doesn’t matter who you are—in time, you’ll discover what you’re best at. Maybe you like to play pump and dump run-ups, or maybe you prefer to short sell like me. But once you find your strong suit, stick to it. You can always try a new path, but focusing on one approach and getting really good at that technique will help you make more profit—faster—than if you’re constantly running around trying something new.
Here’s another thing—don’t expect steady trading profits. Pennystocking isn’t like other professions. This is not like a salaried job where you earn $5,000 dollars a month. You might not earn anything—I used to have trouble getting leases on apartments because my income is so unpredictable. Trading gains aren’t steady, so you’ve got to watch out for trying to force opportunities to make them steady. If you made $5,000 dollars last month, don’t say, “I have to make $5,000 dollars this month to match last month.” NO. You have to wait for opportunities.
Some months, you make $20,000 dollars. Some months, you make $500 dollars. Other months, you won’t make anything. There are times where I haven’t traded anything for 3 months at a time, just because there aren’t any good opportunities. That’s how you have to think of things. You have to say, “Wait a minute—there isn’t anything good here.” Trading is all psychological, so when you create these opportunities in your head, they’re usually pretty wrong and they’re not worth exploring.
There is no room for ego in trading. Obviously, I have a massive ego. I made too much money when I was too young and it came back to haunt me. No matter how much money you make, keep everything in perspective (or, at least, try to). The market will definitely cut you back down to size when you take too large of a position, when you try and force an opportunity, or when you trade in a stock you know nothing about.
Don’t bet too large. Risk 1% of your portfolio, risk 10%, but don’t do much more than that until you have more experience. Think about the way mutual funds operate. Their managers never put more than 5% of their assets in any one thing—why should you do any different? Remember, you can never be 100% certain which way a stock is going to move. Protect yourself and your ability to keep trading by limiting the amount of money you risk on any given play.
Here’s another thing—don’t sell short stocks under a dollar. I don’t care if the stock has run-up from 1 millionth of a penny. Sometimes, it seems like easy money, since stocks can go up so quickly, but it’s just not worth the risk. A stock that’s gone up from $0.05 to $1 dollar might be up 20 times in a few days or a few weeks, but it can still go to $5 dollars or $10 dollars. Don’t sell short too early—under a dollar is always too early.
On a related note, don’t play illiquid stocks. Be incredibly careful about getting into a stock that’s going to be difficult to get out of—especially if you’re planning to take a large position. If a stock only trades 5,000 shares a day, what’s going to happen if you need to get out of 1,000 of them? I don’t care how small your account is, you’re never poor enough to deal with a stock that trades 5,000 shares a day. Play stocks that have millions of shares. Just trust me on this one.
This brings me to my final tip—don’t go it alone. You can learn how to trade penny stocks on your own, but you can also speed up your education if you learn from somebody who’s been there and done that. Think about the top chef in your city. Do you really think he got there by messing around in his kitchen at home? Of course not! He went to culinary school and then worked his way up the ladder, learning from everybody around him.
I’ve shared a lot of different recommendations in this guide, and you can use this to learn the lessons I made from my mistakes without having to make those same mistakes yourself. But the reality is, this is only a tiny part of my story. I could easily fill a dozen more guides this same length with all the trading wisdom I’ve gathered—but I know you don’t have time to sit around and read that much!
If you want to learn even more about my approach to making millions with penny stocks, apply now to be a part of my Millionaire Trader Challenge. I’m on a mission to create my next millionaire student, which is why I give all of my participants complete access to my trading tips and recommendations. They get to look over my shoulder as I make trades and get daily emails with details on the stocks I’m watching (as well as when I recommend making a move).