Technical indicators are important. But are you feeling smart now? You know how to tell a market order from a limit order, and you know what a pump and dump scheme is and who’s behind them.
With the knowledge we’ve covered so far, you’re already 99% further ahead than most amateur traders who blindly follow the stock tips promoters shove down their throats!
But get ready, because things are about to get even more technical… It’s time to start talking about penny stock trading.
First of all, what are penny stocks? We’ve described them briefly earlier in this guide, but let’s get even more into the details. One thing you need to know is that penny stocks have few fundamentals—meaning that they have little-to-no revenues and they have little-to-no profits. Sometimes, they even have huge losses—they really just have no capital. That’s why they’re trading at $5 dollars or less a share and not hundreds of dollars like most blue chip companies.
Penny stock companies’ prices are so low because they have few products—they’re very tiny operations. That makes it easy for them to fail and hard for them to succeed. The thing about a stock’s price is that it’s a good indicator of a company’s odds of succeeding. When a stock like Apple is trading at $130 dollars a share, they’re obviously succeeding. But when a tiny company is trading at a $1 dollar, the odds are they’re not going to succeed—they’re priced low because no one wants the stock. They’re longshots.
As a result, penny stocks offer a high risk in exchange for a potentially high reward. That’s what it comes down to. If you’re an investor, this doesn’t apply to pennystocking. It’s not necessarily high risk because you’re not in a stock for very long. If you were to hold these stocks for a year, you’d have tons of different trading days where something bad can happen. But if you’re in a stock for a few minutes—or even just a few hours—there’s a little risk that something bad could happen, but there’s not as much risk as holding the stock over a longer period of time.
The Good News About Penny Stocks
The good news is that there’s not much to analyze. When you’re dealing with penny stocks, it’s all about hype and gaming the odds of success. It’s very inexact. That’s why people say this is gambling, but really, since you’re gaming the odds, you can really narrow them down a lot more than people think.
There’s also little downside to be worried about. Obviously, since the odds of succeeding are against these companies, it’s not quite so low. When you buy a stock at 17 cents, what’s the worse it can do—go down 17 cents? Obviously, losing all your money still hurts, but if you time your trades right, you can make a lot more than 17 cents. It’s very easy for a 17 cent stock to go to a $1 dollar, as opposed to a $17 dollar stock going to $100 dollars a share. That’s a huge upside potential and if the news is and setup is right, it happens a lot more than you might think with penny stocks.
Another thing I love about pennystocking is that real world success isn’t required from the companies you trade in. Only the EXPECTATION OF SUCCESS MATTERS. A company might be making no products, no revenues, and no zero profits, but if they get people to believe that there’s potential and that they’re going to do it, their stock price rises. It all comes down to a beautiful thing called “hype.”
And hey, if nothing else, penny stock trading is better than any odds you’ll find at a casino.
The Bad News About Penny Stocks
I hate to be the bearer of bad news, but there are a few things you have to know to protect yourself.
First of all, you can’t trust anybody. I mean, you’re dealing with developmental companies. They’re very desperate. They have their whole lives on the line. So they’re not going to tell you the whole truth—they have to promote themselves first. Understand that everybody has an angle.
I’m putting this in capital letters because it’s so important: BE SKEPTICAL OF EVERYBODY AND EVERY SINGLE COMPANY—IT’S CRUCIAL TO YOUR SUCCESS. I’m a pretty cynical guy, but even I’ve made mistakes by not being skeptical enough of everything I was hearing. It cost me hundreds of thousands of dollars, so it’s crucial that you remember this.
This is a hunt. This isn’t some little game—this is a hunt. You’re either the hunter or the hunted. Remember this.
You also have to know that there’s a high failure rate with penny stocks. Over time, the majority of penny stocks drop in price and they mostly fail. I mean, small companies, they fail in mass—something like 7 out of 10 startups fail within their first six month to a year.
Because of that, prices move quickly. When you have companies popping up and dropping out of the market, stocks can rise exponentially or plummet within days. You can make money by learning to ride this volatility. These are waves. All you’re doing is surfing the volatility—you’re surfing the price momentum, if you want.
You have to be quick, and you have to stay on top of your game. It’s a cutthroat world out there, but it’s one that you can learn and profit from if you’re careful.
Penny Stocks | Positive Signs
So since I said you’ve got to learn this world in order to profit from it, let’s get into some of the signs I use to find good pennystocking opportunities.
- POSITIVE EARNINGS OR CONTRACTS. Seeing that a company has positive revenue is a step in the right direction. Remember that I said you can’t always trust information that companies and promoters publish about themselves, but if you can verify positive earnings or contracts, that’s a great sign to see. Especially contracts with large companies.
- FINANCING. Hearing that a penny stock company just closed a financing round at or near the current stock price proves that investors are buying into the business’s story. The more capital raised—and the more reputable the investors—the greater the odds of success. Again, remember that pennystocking is all about gaming the odds of success, so look for little signs like this. When a company raises $2 million dollars, obviously there’s a greater chance for them to succeed, just remember to be careful if they raise money at too great of a discount to the current stock price, it’s a sign the current price is overvalued.
- NEW PARTNERSHIPS. Crazy enough, it doesn’t actually matter if the partnership that’s announced is meaningful or not. Any deal announcement means that another company is interested in this company’s products. That’s going to hype the penny stock, and the stock prices are going to go up. Monitor these partnerships.
- POSITIVE INDUSTRY NEWS. Sometimes, these companies are still doing nothing right, but they’re at the right place at the right time. If positive news about their industry in general is announced, their stock prices can rise with the expectations. We’ve seen this recently with marijuana penny stocks when several states legalized the drug and police equipment/body camera stocks when there was a heated national debate due to several questionable police brutality cases.
Here are a few other positive signs that a stock’s price is on the rise:
- An intraday breakout
- A 52-week high
- A stock making higher highs
- An increase in trading volume
- A short squeeze pushing the stock price higher
- A stock that’s able to break resistance or hold support
Any of these events can happen with the stock’s price. Again, though, this isn’t dealing with the company—these are all dealing with the stock price itself.
But remember that you aren’t the only one watching for these signs—there are plenty of other people looking at this stuff. Since these events are so easy to find, a lot of people believe in them, which can create a self-fulfilling prophecy that pushes prices even higher.
I share even more of these signs with my millionaire trader challenge students, so if you’re serious about learning how to identify great penny stock plays, apply now to join us!
Penny Stocks | Negative Signs
Let me be clear. When I say that these are negative signs, it means that they’re indications that a stock’s price is going to go down. That doesn’t mean that you shouldn’t take a position in the company. Remember that with short selling, you can make money on the way down if you get in at the right time.
- FINANCING. Even though financing is usually a positive sign, it can be negative as well. Say you see a company close a financing deal at a 70% discount to market price. This means that they’re desperate for money—it’s a very bad sign. So when you see an example of financing, try to figure out whether it took place because the company is interesting investors or because they’re begging for money and always look at what price the financing took place.
- RUMORS. Rumors aren’t necessarily negative, but anything that can’t be confirmed is really just dangerous in this market. Remember, this is a simple little market niche—you should be able to confirm everything or it’s likely not true. So forget about why there’s a rumor—just get out of your position. Why invite disaster? It could be true, it couldn’t be true—you just don’t know and gambling with low or unknown odds of success will not make you rich anytime soon. My top students and I didn’t become millionaires through luck; we grew our accounts by capitalizing on trading setups where the odds are in our favor, hence why we win 65-75% of the time.
Never fool yourself that you can guess if a rumor is true. Even all these people with “insider information,” they don’t know. Nobody knows, and if they do, then it’s illegal and you don’t want to have anything to do with it.
- NEGATIVE INDUSTRY NEWS. Just like companies can be at the right place at the right time, they can also be at the wrong place at the wrong time if negative news comes out that affects their entire industry. It’s nothing that the company does specifically, but it’s still possible for their stock prices to drop due to nervousness.
Any of the following signs can help you find negative price movement as well:
- An intraday breakdown
- A stock that breaks through support to a lower level
(meaning that it can’t hold the support)
- A 52-week low
- A stock that’s reaching lower lows
- Volume drying up
Obviously, these are all very bad signs for the stock. You don’t want to be long, but it can be a lot of fun to be a short seller when these signs happen—especially if stock can’t break resistance or hold support.
These are all signs that you want to go short—and I’ll tell you more about that when we get to the charting section of this guide.
Penny Stock | Neutral Signs
The following signs aren’t necessarily positive or negative, but they’re all things you’re going to want to keep an eye on. Contrary to what most people believe, sometimes you don’t know what a stock will do, it’s neither a buy nor a sell…sometimes the best trade is no trade at all. Or when I’m in an uncertain trade already, I live by the motto “when in doubt, get out”.
First, you have earnings. Obviously, earnings dates, the date on which a company will announce their quarterly results, are announced ahead of time. We say, “Okay, this company is going to report earnings on such and such date and time,” so you know when earnings reports are going to be released. Put those dates on your calendar for any stocks you’re watching and do not be trading them ahead of these important quarterly events because they’re guessing games!
The thing about earnings—and I’ll talk about this more later—is that good earnings reports don’t mean a stock is going to go up and bad reports don’t mean a stock is going to go down. It just doesn’t work like that. Remember, every company already has expectations priced in so even good earnings might lead a stock to fall and bad earnings might cause a stock to rise if they’re not as bad as people expected. Companies also make comments in reaction to their own earnings so sometimes great earnings #s might spike a stock initially, but then once people read the CEO’s negative comments about the future, the stock could drop.
What matters is how people react to the earnings event as a whole. I never recommend trading before or immediately on earnings reports, just because you have to see what people are going to do. It’s their reactions and expectations that’ll set the price and make it move one way or the other and it’s far easier to buy “earnings winners”, or stocks with good reactions to earnings as that kind of news has legs for days, weeks or even months. And best of all you don’t have to play the low odds guessing games that everyone else seems to enjoy playing.
- FUTURE APPEARANCES. You don’t get much lead time on this, but if a company is going to be featured on something like CNN or Fox & Friends, they usually like to announce it a day or two before. That gets people interested in the stock, which can lead to some some solid uptrending price action in anticipation of their appearance. I had my first $100,000+ profit day when I was just a Freshman in college buying a penny stock that announced on a Friday they’d be on TV on Sunday. I bought on Friday afternoon and sold on Monday morning after the TV appearance and banked more in one day than most people make in an entire year. See that incredible trade here in Chapter 6 of my bestselling book
- ANALYST DAYS. With penny stocks, you don’t have a lot of analysts covering them, but sometimes they do. So with these analysts, they have days where penny stock companies present to them and try to tell them their whole story. If an analyst actually gets interested, there’s a chance they might bump up the stock’s rating and put it in front of a bunch of potential investors.
Remember that most penny stock companies are complete crap with no revenue, no profits and no products. It’s incredibly rare for this to happen and if it does, analysts are usually left disappointed by what the company has to say. Remember, penny stocks are very low priced for a reason.
- ANALYST COVERAGE. Similarly, analyst coverage can impact a stock, but it’s rare in this case, because most analysts don’t cover penny stocks. Pay attention, though, because this can happen at any time, especially after a breakthrough contract win or earnings report. And if an analyst does feel the need to write about a company, there’s a good chance that the stock price will surge—especially if the coverage is positive.
- CONFERENCE CALLS. These can happen at any time, but companies will usually announce them a day or two—or maybe even a few weeks—ahead of time. They’ll say something like, “Look, we have an earnings conference call coming up where we want to discuss things.” So these calls are planned and you can use these planned events to recognize that there’s going to be a potential upcoming impact the stock price, based on how things go on the call.
- NEWSLETTER RECOMMENDATIONS. These can happen at any time, and they really influence stock prices, because a lot of people don’t want to do their own research. They want to be fed a fish—they don’t want to learn how to fish. So they follow these newsletters and when they act on the newsletter’s recommendations, the prices swing out of control. So you need to keep an eye on the major newsletters so that you can tell when one of their recommendations is impacting the stock price, they can spike a stock from anywhere for a few hours to days, but usually lead to disappointment for those who piggyback the picks because we must always remember, most penny stock companies fail and their stocks crash and burn in the long run (so remember to just play the short-term momentum, don’t fall in love with ANY company, story or stock).
- SEC TRADING SUSPENSIONS OR HALTS. Again, these events can happen at any time, usually after big pump and dump-induced runups. Most penny stocks don’t have to file with the SEC, but a lot of them wind up being halted by the SEC because of all the crazy hype and manipulation with penny stocks. So sometimes, the SEC halts the stock from trading, basically saying, “Wait a minute—we want more information from you before we’re going to let you keep trading.”
Usually, when an SEC halt takes place, the stock just gets annihilated when it reopens—if it opens at all—because if the SEC is fishing around, investors start to wonder what the company did wrong. Even if they didn’t do anything, it’s a good idea to avoid companies that are halted or rumored to be halted as investors can lose anywhere from 30-99% of their money during an SEC halt.
- MANAGEMENT CHANGES. Just like earnings reports, management changes aren’t necessarily positive or negative. It’s all in how investors respond to the news. If a bigtime new CEO is brought in to turn a company around, that could spike a stock price for days or even weeks.
Usually, though, it’s a bearish sign for the stock, because no matter what the press releases say, it’s all crap and management figure leave due to broken promises and disappointments. Remember, management lies. They have to be optimistic. When there’s a management change, it means that the manager got fired, there was a power play, he got pushed out, or he’s just quitting. Any way you look at it, it’s pretty much a bearish sign until somebody more respected comes onboard.
- LAWSUITS AND FDA APPROVAL. These are three very important events that can happen at any time and I prefer to stay away from biotechnology penny stocks and companies involved in litigation for this very reason. If a penny stock company wins a court case and investors think it’s a good thing, the price is probably going to surge. Obviously, with a lawsuit, if a company gets sued, it’s going to head in the opposite direction. But like earnings reports, sometimes comments made in a judge’s decision can influence a stock in the opposite direction you might expect, another low odds guessing game.
FDA approvals work the same way. If a company applying for approval gets accepted, the stock price can go up 100%, 200% or even 300% in a matter of minutes. But if they get rejected, it could drop 50% to 60% and the bad part is that the stock in question gets halted before the decision is announced so there’s no way to cut your losses quickly. Which means you cannot quantify your risk and no matter the potential rewards, I don’t like trading stocks that have infinite risk. So just be aware of these events—especially if they affect any of the stocks on your watchlist.
- The last sign I want to cover here is INDEX ADDITIONS. The beautiful thing with penny stocks is that you don’t have to worry about this, except in the rare event that a pennystocking company gets added to the Russell 2000 or uplists to a more respectable exchange. It happens every few months and the stock price will usually pop, because of the mutual funds and other funds that invest in the Russell 2000 and are then required to buy into that stock. Sometimes, there’s some opportunity to profit, but remember that this is news that everyone has access to. It’s very tough to make money off of it.