Penny stocks are usually small companies that might be new, that might be in an up-and-coming sector, and might even be in danger of going out of business.
I’ve made millions trading penny stocks.**
I’ll tell you right away, that’s not typical. But it’s been done. I’ve done it, and several of my top students have…
Like Tim Grittani, who’s up about $11 million** in profits:
Or Mark Croock, who’s up nearly $2 million** in profits …
Or Michael Goode, my first millionaire student, who’s made a little over $2 million.** He actually thought I was full of BS before he gave my strategy a try, and now he’s glad he came around!
Do I have your attention? Good. Let’s talk about one of the most hated — and misunderstood — trading styles out there: day trading penny stocks.
Let’s be real. You probably found this post by googling something like “how to get rich quick trading penny stocks.” Sorry. You won’t get rich quick in this niche. But I can teach you what I’ve learned in more than two decades in the stock market to help you shorten your learning curve.
There’s not some big secret to finding consistency trading penny stocks. It’s all about hard work, discipline, and studying. You have to work for slow, steady progress and small wins over time.
(**Note: success as a trader requires dedication and effort. Most traders lose money. These results are not typical. All trading is risky, so do your due diligence. Never risk more than you can afford to lose.)
Table of Contents
- 1 How I Trade Penny Stocks
- 2 What Are Penny Stocks and What Is Penny Stock Trading?
- 3 How Do Penny Stocks Work?
- 4 Penny Stocks to Watch for January 2021
- 5 Is It Illegal to Trade Penny Stocks?
- 6 How to Start Trading Penny Stocks the Right Way?
- 7 Who Is This Penny Stock Trading Guide For?
- 8 Unique Penny Stock Characteristics
- 9 Are Penny Stocks Worth It in 2021?
- 10 The Risks of Investing in Penny Stocks
- 11 How to Develop the Right Mindset for Trading Penny Stocks
- 12 How to Trade Penny Stocks
- 13 Important Stock Terms You Need To Know
- 14 Best Brokers for Penny Stocks
- 15 How to Find Top Penny Stocks to Trade
- 16 How to Develop Your Own Trading Strategy for Penny Stocks
- 17 My Most Important Penny Stock Tips
- 18 What Are the Key Indicators of Good Penny Stocks?
- 19 Key Chart Patterns of Penny Stocks
- 20 Stock Chart Patterns
- 21 The Best Penny Stocks Chart Patterns
- 22 Using Financial Ratios For Penny Stocks Trading
- 23 Frequently Asked Questions About Penny Stocks Trading
- 24 Conclusion: Are You Ready to Start Trading Penny Stocks in 2021?
How I Trade Penny Stocks
A lot of you probably don’t want to hear this … but most of the money I’ve earned has been in small increments. I aim for singles, not home runs. These days, I trade safe, and I urge my students to do the same.
I’m not right all the time — as you can see from my trades, which are ALL posted publicly — I’m right about 70% of the time.
But it doesn’t matter that I’m wrong sometimes. No trader has a perfect record. What matters is that I take the time to look for the right setups. I’m disciplined about cutting losses. That puts me far ahead of most penny stock traders who eventually fail because they don’t follow the rules.
I want to teach you how to trade penny stocks intelligently — and that starts with learning the rules of the game.
I’ve been trading for 20+ years and teaching for 10+ years.
I’m already rich — I don’t need more money. Every year, I start fresh with a small account. I do this so I can show my students how to trade starting with a small amount of capital.
I trade primarily to teach, and I donate my profits to charity. Most recently I’ve been donating to Direct Relief…
I finished the day +$1,790 despite chasing $CREX $VYST a bit, nailing $LUVU & a nice buy on $MARK too, now I’m +$136,066 ALL of which gets donated to my favorite charity right now @DirectRelief so I can help the #FrontLineHeroes & focus on teaching my students the proper process
— Timothy Sykes (@timothysykes) May 11, 2020
Still with me? Good. Hopefully, the get-rich-quick schemers who are too lazy to actually work for success have already clicked off to go blow up their accounts. But if you’ve made it this far, let’s get down to business.
I want to tell you everything you need to know about how to trade penny stocks. We’ll cover what they are, how to get started, and how this style of stock trading is different from any other.
What Are Penny Stocks and What Is Penny Stock Trading?
In spite of the name, ‘penny stock’ actually refers to a stock trading for under $5 per share.
Sure, that could be stocks trading for fractions of a penny, but even a stock trading for $4.95 could still be considered a penny stock.
Pennystocking as a verb just means trading penny stocks. But that’s not to say that pennystocking follows the same trajectory of buying and selling regular stocks of large-cap companies like Google or Amazon.
Pennystocking is a unique style of trading that requires a specific strategy and mindset. To start to understand what that means, let’s get into the mechanics of penny stocks.
How Do Penny Stocks Work?
What if I told you I don’t believe in any of the penny stocks I trade?
I know, it sounds pretty cynical — and counterintuitive.
Generally, people think the stock market’s all about finding a company you believe in, investing in it, and holding that stock for years.
Penny stocks are the opposite. The fact is, most penny stocks will eventually fail. But before they fail, they could experience some massive spikes.
Because of their small size, these companies feel the impact of just about any news catalyst in a big way.
A single press release could cause crazy spikes in a stock price … I saw it just a few weeks ago when Lighting Science Group (OTCMKTS: LSCG) spiked more than 1,000%.
WOW $LSCG .08 to .99 now back to .30 all in the last hour, good reminder to NEVER use market orders LOL
— Timothy Sykes (@timothysykes) May 11, 2020
As a penny stock trader, my approach relies on finding patterns within these spikes and taking advantage of short-term price movements in the market.
Remember: these aren’t long-term holdings like blue-chip stocks. Rather, you’re trying to take advantage of the short term movements of a volatile marketplace.
Penny Stocks to Watch for January 2021
At any given time, there’s a trending sector or two in the stock market.
But in 2020, the stock market’s been on fire. The coronavirus has both directly and indirectly created market volatility that’s unlike anything I’ve ever seen.
The best thing traders can do during times like these? Be prepared.
I’m prepared. My students are prepared. When the market is providing opportunities, we’re on top of them.
I’ve made over $730,000 so far in 2020 — as opposed to about $125K in 2019.*
It’s not because I’ve gotten a lot smarter in the past year. And it’s not because I started with a bigger account. I start each year fresh with a small account because my focus is on teaching. But the opportunities have been there.
The market right now is exceptional. Are you ready?
To get up to speed. Check out “The Volatility Survival Guide.” This is my no-cost two-hour guide to help in understanding the current volatile market. And it can help with any future market volatility, too. I also maintain a list of monthly penny stocks to watch.
And you can start your trading journey with my new 30-Day Trading Bootcamp. Matthew Monaco, one of my top students, helped me put this together. Even some more experienced students are amazed by this guide. And the price is outrageously low.
Learn more about the 30-Day Bootcamp here. (FYI, you don’t have to complete it in 30 days. You can complete it at your own pace and repeat it as much as you need.)
Examples of Recent Penny Stock Runners
Toward the end of August and into September, we’ve experienced some slowdown in the market. But there are always opportunities. It’s a matter of waiting and watching for the right ones.
To give you an idea of the tone of the market right now, here are some examples of recent plays…
Alternet Systems, Inc. (OTCPK: ALYI)
Repeat after me: former runners can run again. ALYI is the perfect example. This was a morning spike that happened right after the market open.
I actually wasn’t looking to trade anything right away. But ALYI had recently spiked from under a penny per share to about 5 cents, so it was a recent multi-day runner.
It had gone down, but on Friday, September 4, it had news. So I saw it as a potential first green day.
You don’t know if it’ll finish at the top or bottom of the candle, but it did have a morning spike attempt. I bought at $0.023 and sold into the first spike at $0.0255 right after the market open and made a $1,812 profit.*
Here’s the interesting thing, though — the second bounce was actually even better. It went from the $0.02 low to about $0.025. That demonstrates an emerging pattern I’ve been seeing the past few weeks — the 11 a.m. dip and bounce.
Polymet Mining Corp. (NYSEAMERICAN: PLM)
This play goes to show that even if you miss the initial spike, there still could be chances for entry.
This was a beautiful breakout over the previous highs at $3.80. Even if I’d caught it there and alerted it, it spiked so fast that it would have been hard for my students to react. It got up to $4.50 in a matter of minutes.
So yeah, I missed that. I got in the dip in the low $3.90s. In spite of a good theory, things were going wrong — my Level 2 wasn’t working, and the overall market was tanking. I trade scared, so I got out. As it turned out I got out a little too early, but I still made a nice $882 profit.*
I probably could have made more, but I was flustered due to the market conditions and trying to manage the all-day webinar I was leading at the time. I’m all about staying safe, so no regrets!
(*These results are not typical. Individual results will vary. Most traders lose money. My top students have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose.)
Is It Illegal to Trade Penny Stocks?
If everything you know about penny stocks came from “The Wolf of Wall Street,” you might think that they’re illegal.
False. Trading penny stocks is completely legal.
But it is true that penny stocks can be super shady.
Yes, some penny stocks trade on big exchanges like Nasdaq. But a lot of them trade through OTC (over the counter) exchanges.
There’s a world of difference in terms of standards between OTCs and Nasdaq- or NYSE-listed stocks. The regulations aren’t as stringent for OTCs, which means there’s a lot more potential for fraudulent behavior.
Here’s the thing … As a penny stock trader, this can actually work in your favor.
There are a ton of schemes around penny stocks, like pumps and overhyped promotions … Your job is to see through them, outsmart them, and take advantage of the short-lived spikes they can create in the market.
How to Start Trading Penny Stocks the Right Way?
What’s the wrong way to trade penny stocks?
Believe that these tiny companies will change the world, then cry about your decimated account when the stocks inevitably crash and burn.
Sure, a penny stock could turn into the next big thing. But it probably won’t.
So what’s the right way to trade penny stocks?
Trust no one. Know in your heart that most of these companies won’t succeed … But that they could experience some huge spikes before they fade into oblivion.
Once you recognize that most of these stocks will fail, you can trade like a sniper.
There are two key ways to trade penny stocks: you can go long or short.
Going long: In spite of the term, “long” usually refers to a short-term buy-and-sell trade with my trading strategy. For me, it’s a short-lived affair … Intense, then over. OK, sometimes it happens again if the opportunity is right with a repeat runner…
You might see me holding overnight, but you won’t see me holding for weeks or months.
You borrow shares that you don’t already own from a broker, then sell them when the price drops. Then, you buy them back at the lower price, give them back to the broker, and keep the price difference. Sounds strange, I know, but it’s a thing.
Regardless of whether you go long (buying then selling) or short (borrowing, selling, then buying back), the goal is always to generate a profit. The profits might be small, but they can add up over time.
Who Is This Penny Stock Trading Guide For?
Maybe it’s more important to tell you who this guide isn’t for: people who want to get rich quick.
In spite of what some jerk may say in a YouTube ad, there are no guarantees in the stock market. For every person who strikes gold, there are hundreds –– thousands! –– who blow up their accounts.
Most traders fail. This guide is for those of you who want to trade smart.
It’s for traders who want to understand penny stocks and work toward their goals the right way … over time and with discipline.
Boring, right? I’ll confess: trading isn’t always fun. Executing an order is exciting … But it’s a lot of research, scanning, keeping watchlists, hard work, and waiting for the right setups.
Truth: for me, trading penny stocks was about getting rich … at first. But not anymore. Now, in retrospect, I see it as my path toward freedom and living the life I want.
Because of penny stocks, I earned enough money to never have to get a “real” job again. I bought my parents their dream home in Florida (Connecticut sucks in the winter).
I have the freedom to travel. I’ve been around the world. This is the life I want.
Over time, my objectives have changed. Early on, I bought a bunch of fancy cars … It was great to make my childhood dream a reality, but now I’m over it. These days, I get the most joy from traveling, teaching, and my charity, Karmagawa…
These might not be your goals. My point? Goals can change. Trading penny stocks could be part of you reaching them, whatever they are.
Stocks vs. Commodities vs. Derivatives vs. Real Estate
There’s a ton of confusion between “investing” and “trading.” Let’s talk about it.
Investments are all over the place: things that you can put your money into with the hope of a return.
I’m not a penny stock investor or an investment advisor — I’m a trading educator who specializes in penny stocks.
Even though I’m a short-term trader and not a long-term investor, I think it’s important to understand investment basics. After all, most rich people have more than one stream of income.
There are four basic categories of investments: stocks, commodities, derivatives, and real estate.
- Stocks are shares of a company. You can buy shares at a particular price, and sell them for either a profit or loss.
- Commodities are physical substances or raw materials that come from the earth. Think gold, silver, oil, wheat.
- Derivatives are investments that take their value from something else. Options are an example of a derivative … Instead of buying or selling a stock directly, you create a contract with the option to buy or sell a certain number of shares at a specific date.
- Real estate is a whole different thing. There are various styles of investing in real estate, including flipping houses sold at auction, renting properties to tenants, developing commercial spaces, and so on. It’s not my scene, but you do you.
Unique Penny Stock Characteristics
Penny stocks aren’t like other stocks.
These are NOT stable, established companies. They’re usually small. They might be new, they might be in an up-and-coming sector. They might even be in danger of going out of business.
This part is important: unless these companies are listed on a bigger exchange, they’re not required to make the same SEC filings as their bigger counterparts.
This means you can’t take things for granted with penny stocks like you might with bigger companies.
Yep … penny stocks can be kind of sketchy.
But it also means that if you’re willing to spend the time to do a little research and look at the charts, you might agree with me that they’re actually pretty simple to trade.
I personally think that you can learn to trade penny stocks a lot faster than you can learn about trading larger securities.
The low price point means that you can start trading with a small account and learn as you go. Since you’re only investing small amounts in each play, your returns may be small … but so are your losses. It’s one way to scale up slowly, over time.
Are Penny Stocks Worth It in 2021?
Listen, I’m biased.
Penny stocks have made me millions.** They’ve made me over $418K so far this year.**
We’re in an insane market due to the global coronavirus pandemic. Are they worth it? Can they help you grow your account? Of course I think so.
But these are possibilities, not promises. You need to know these things:
- Penny stocks are NOT for every trader.
- You need to have a solid work ethic.
- You need to learn to think for yourself.
- You need to be willing to do research.
- You need to be disciplined to trade penny stocks.
- You need to learn — a LOT.
- You need to be able to stick with your trading plan.
If you can’t do ALL of these things, then penny stocks are probably not worth it for you.
But if you’re willing to educate yourself and become a self-sufficient trader, then my vote is yes: I think penny stocks are worth it.
The Risks of Investing in Penny Stocks
Are there risks associated with penny stocks? Oh heck yes. To name a few:
- They’re generally not as regulated as large-cap stocks.
- They’re volatile.
- Most of these companies will fail.
How to Minimize Risk When Trading Penny Stocks
You know what? I don’t like risk.
You don’t need to be an adrenaline junkie to trade penny stocks. In fact, you should hate risk so much that you’re willing to do anything and everything possible to avoid it!
It’s simple logic: If you take huge risks in the stock market, you stand to lose a huge amount of money. In some cases, you could lose even more than you invested in the first place.
Not my idea of a smart trading strategy.
If you want to stay in the game for the long run, focus on discipline, rules, and cutting losses. Practice smart risk management. Never invest more than 10% of your trading account on a single play, and if you have a small trading account, limit that to 1%.
You need to set your own boundaries based on your risk tolerance. What are you willing to bet on a single play — and what will happen if you’re wrong?
Write down your own rules and stick to them. Need help figuring out the rules? Start here.
How to Develop the Right Mindset for Trading Penny Stocks
You’ve gotta remember: penny stocks are NOT traditional stocks. Trading them requires a specific mindset.
I’ve already told you about adjusting your expectations about the companies behind the stocks … Knowing and understanding that most of them will fail.
But another big adjustment is that you need to change your mindset about failure.
In the stock market, failure is unavoidable. If you’re the type of person who always needs to be right, this is not the game for you.
You can’t trade penny stocks without failing at some point. I’ve failed over and over again.
Don’t believe it? Check out my book, “An American Hedge Fund.” I recount some of my biggest mistakes and losses in full detail.
Instead of trying to avoid failure, resolve to learn from it. If you’re willing to work hard, accept failure, and learn from your mistakes, pennystocking could be right up your alley. You’ll learn that failures can eventually turn into success!
How to Trade Penny Stocks
The first thing that you’ll need to trade penny stocks? An education.
Before you can hope to have any success as a trader, you need to learn what penny stocks are, how they work, and how to identify patterns.
A good starting point? This guide and my student Jamil’s book “The Complete Penny Stock Course.” It covers all the basics and more. From there, if you want to take it to the next level, consider joining my Trading Challenge.
Once you’re ready to actually get started trading, you’ll need a few key things…
To trade stocks, you need to open a brokerage account. Your broker is the gateway between you and trades. It’s vital to choose a good one … don’t just go with the cheapest one. Do your research and check out this guide for more tips.
You’ll need to narrow down the many choices of stocks to trade somehow. A stock screener can help you do this. You can use it to filter based on criteria that you set, for instance, percentage gainers with volume, etc. I use StocksToTrade, which can also help you with the next item on the list…
To really get a good overview of a stock’s health, you’ll need to perform detailed stock analysis.
There are two key types of stock analysis: fundamental analysis, where you look at the company itself, and technical analysis, where you look at the stock’s chart and try to find recognizable patterns.
StocksToTrade can help you do both: it’s got awesome charting software, but also links to relevant news, SEC filings, and even social media mentions related to stocks.
Both types of analysis are important, but with penny stocks, technical analysis is more important. I read chart patterns constantly. I want to see how a stock’s performed over weeks, months, or even years. What patterns can I detect in those charts? What might influence forecasted performance?
You need a trading plan if you want to trade penny stocks. This is like a map where you plot out your entry and exit points. Ideally, you base these numbers on careful research and have the discipline to actually stick to your plan.
Important Stock Terms You Need To Know
Whether you’re trading penny stocks or higher-priced stocks, you’ll need to be familiar with some basic trading terms. Here are a few key ones:
- Buy: To buy shares of stock with the purpose of profiting off an increase in stock price
- Sell: To sell shares of stock to make a profit or prevent further losses
- Short sell: Borrowing stock you don’t own for the purpose of profiting off a stock that dips in price
- Buy to cover: Buying back the shares of stock you sold short to profit
- Bid: The greatest price someone else is willing to pay for a stock
- Ask: The asking price for a share of stock
- Spread: The difference between the bid and ask prices
- Uptick: A situation where a subsequent trade is at a higher price than the previous one
- Downtick: The opposite of an uptick
Want more? Check out these 37 Stock Market Terms Every Trader Should Know.
Where to Buy Penny Stocks
Some penny stocks can be found on major exchanges, but you can also trade on over-the-counter (OTC) exchanges. What are they?
Certain stocks don’t meet the requirements of the bigger exchanges for various reasons, such as size, profits, etc.
For companies like these, there’s OTCMarkets. OTC stocks tend to be lower in price but higher in risk. They’re generally up-and-coming companies, and OTC listing requirements aren’t as strict as the NYSE or Nasdaq.
Best Brokers for Penny Stocks
I’m not a huge fan of any specific brokers. However, brokers are a necessary evil if you want to trade.
So I go with the two that I think suck the least: E-Trade and Interactive Brokers. In my experience, E-Trade is best for U.S. traders, and Interactive Brokers is mainly for international traders.
I’m not paid to use them — I’m just being transparent.
Personally, I don’t like Robinhood. Even though they have no minimums, you won’t find a lot of the penny stocks I trade on that platform. A lot of the best stocks are under $2 a share. In my experience, Robinhood isn’t good if you’re specifically looking for low-priced stocks.
If you can have two brokers, it can prove advantageous — especially for day traders who are concerned with the PDT rule.
For more information on brokers, check out this post.
How to Find Top Penny Stocks to Trade
Wanna find great stocks to trade? Here’s how to get started.
Using Scanners to Find Penny Stocks
There are thousands of stocks to choose from. You can’t trade them all, and you shouldn’t just trade them randomly.
How can you narrow down the choices? With a stock screener. A stock screener lets you filter based on the criteria that you set. That’s how you can find the best contenders for trades that fit setups that work for you.
I helped create what I consider one of the best screeners out there: StocksToTrade. Created by traders for traders, this is a one-stop-shop screener that has amazing charting software and research tools, too.
And for traders who are still getting up to speed — it’s got a great paper trading (virtual trading) platform, too.
The StocksToTrade team works hard to add more useful tools to the platform all the time — like a social media search tool and the Breading News chat feature. Check out how much I love Breaking News chat and why…
How to Develop Your Own Trading Strategy for Penny Stocks
Why not just follow what other traders are doing, or trade based on my alerts? Because it’s impossible to replicate what another trader does.
All traders have their own unique style … and strengths and weaknesses. So rather than trying to follow stock alerts, work on increasing your knowledge and developing your own trading style and strategy.
There are a lot of factors that play into your trading success or lack thereof. But I can tell you that none of the top traders I know follow another trader’s alerts.
My Most Important Penny Stock Tips
Want some real insider tips about how to get ahead as a penny stock trader? Here goes …
- Educate yourself. Education is the key to everything … especially in the stock market. Get smart, and you’ll trade smarter.
- Be adaptable. Patterns repeat, but it’s not an exact science. The same setup that’s worked 99 times in a row might not work tomorrow, even if you don’t change a thing. Unless you want to become extinct as a trader, be nimble and adaptable.
- Maintain a strong penny stocks watchlist. To stay on top of the best opportunities, you have to create and maintain a strong watchlist. This is a list of stocks that you’re interested in. Monitor them regularly and weed out the weaklings as needed.
- Keep records of what you do. A trading journal is one of the most important assets for any investor. In it, you’ll record every trade you make as well as your observations and the results. It will help you avoid making the same mistake twice.
- Learn from your mistakes. Have you ever lost $500,000 on a single play? I have.
My mistakes are numerous, but I’m still successful. That’s because I learn from my mistakes and cut losses quickly!
Ready to Get Started With Penny Stocks? Apply for My Trading Challenge
My Trading Challenge is based on my 20+ years of experience as a trader. The goal? Help traders help themselves … I want you to trade smart, safe, and self-sufficient.
During my time in the market, I’ve learned a lot — and I share it all with my students.
I don’t accept everyone. I might be the hardest-working trading teacher out there, and I want people to appreciate my lessons.
I’m NOT gonna do all the heavy lifting. You’ve got to take my teachings as a guide … I want you to use them to develop your own strategy. Do NOT expect to just get hot stock picks.
Ask yourself this: What’s the best that could happen if you dedicated yourself to learning how to trade penny stocks?
What Are the Key Indicators of Good Penny Stocks?
I call myself a glorified history teacher because I’m constantly looking to the past. I’m doing that to try and figure out how stocks might move in the future.
It’s never exact, but history usually repeats itself pretty closely.
So you need to learn to read chart patterns … but more importantly, you need to learn to understand them. This is something that really only happens with time and practice, which is why it’s SO important to study.
To back up what you’re seeing on the chart, it’s important to consider key indicators to determine whether a stock will perform well in the future.
‘Indicator’ can be a pretty broad term, but it refers to any sort of flag that can work in or against your favor when deciding to make a trade.
I don’t really look at too much fundamental information for penny stocks, since I know most companies will fail.
However, there are things you can look at that can help you evaluate what kind of risk you’re taking on.
Positive Indicators to Look for Before Trading
Here are some positive signs that a stock could continue to go up:
- Positive earnings and new contracts
- Positive financing
- New partnerships
- Increases in trading volume
- Positive industry news
Negative Indicators to Look Out For With Stocks
If you see these negative signs, it could be an indication that you should stay away from a trade … Or consider going short.
- Financing secured through desperation
- Rumors of negativity from within the company
- Poor industry news
- Reduced trading volume
Key Chart Patterns of Penny Stocks
If it seems hard at first, don’t worry — it takes time. You can learn to read chart patterns but still not really understand them. Think of each stock as a personality. It has its own way of moving depending on the company behind it and external factors.
Regardless of the type of chart you prefer, I recommend looking at several time frames. That can give you a better overall view a stock’s momentum and how it’s performed in the past.
The four most common types of charts are the following:
Personally, I favor the candlestick. It’s easy to read movement in a candlestick chart based on whether the “wicks” are black, white, or red.
Bar and line charts are simple and don’t tell you as much. Honestly, I find it laughable that people try to rely on oversimplified charts to make trading decisions, but that’s just me.
As for area charts … I don’t know anyone who prefers area charts. They’re messy and difficult to understand at a glance.
Stock Chart Patterns
Chart patterns describe how a stock price moves over time — specifically in up and down movements. Although history doesn’t always predict the future, you can identify patterns that allow you to make educated guesses about a stock’s future performance.
Clean Stock Chart
This is my favorite type of chart. The stock’s price moves in one direction — up or down — with regular but brief changes in direction that quickly reverse.
You need to pay attention to clean charts. They’re highly predictive and can allow you to take advantage of quick profits on a long position or a short-sell.
However, you don’t want a chart that looks too clean. This type of chart has an upward or downward trend with almost no variation.
An extremely clean chart — especially one that remains clean for six to 12 months — often precipitates a steep increase followed by a steep decrease in price. If you’re not fast enough, you could lose significant cash.
You might have heard the terms bull and bear market. A bull market trends upward, while a bear market trends down. The same applies to chart patterns.
A clean bullish chart shows a steady upward trend. The stock price might fall on occasion, but it jumps right back up — often farther than it was before its brief decline. This is a good time to make your play because you’re likely to see the trend continue.
A clean bearish chart is the exact opposite of the clean bullish chart. There’s a definitive decline in stock price over time. It might spike every once in a while, but the downhill pattern is evident from a first glance.
It often happens after a steep increase in price. A company might announce new funding, for instance, that excites investors. The stock price shoots up, but it can’t sustain the hype, so it begins to fall back.
Clean Breakout and Clean Breakdown
Clean breakouts and clean breakdowns show that a stock has either broken through resistance or fallen below support respectively.
The chart is clean because the pattern either repeats itself or shows significant pattern repeats prior to the breakout or breakdown.
Clean Cup and Handle
You can identify a cup and handle chart by its shape. You’ll see a smooth downward trend followed by an equally smooth upward trend.
After that, the price drops precipitously. It’s difficult to play this type of chart, but I’ve done it.
I encourage you to look at messy stocks. Their charts are all over the place with no discernible pattern. The stock price might jump for no reason at all, fall a little bit, rise a little bit, fall again, and so on. But those peaks and valleys don’t repeat reliably.
While I think you can learn from these charts, don’t trade on them. There’s no way to predict what the stock will do next because you don’t have a pattern from which to learn.
A messy breakdown starts with an upward trend. At first, the chart will look pretty clean (and appealing). Then, seemingly out of the blue, it’ll drop.
The pattern becomes extremely messy from there, with dips and increases that have no obvious reason behind them.
The Best Penny Stocks Chart Patterns
Now, we’re getting to the good stuff. Nobody else (except my Trading Challenge students) uses these patterns because they’re mine.
I created them after watching stock charts for years and better understanding the patterns that play out.
The Supernova Penny Stock Chart Pattern
We’ll start with my favorite. The supernova looks like a stock chart exploded. It might have experienced modest peaks and valleys over several months, then it skyrockets for a short period of time.
I love supernovas. If you learn to ride the momentum, the potential gains can be meaty. I’ve seen penny stocks shoot up to 10 times or more in price. Learn more about this pattern in my Supernova webinar replay.
The Stair Stepper
This stock pattern looks just like a staircase viewed from the side. It goes up, flatlines, then goes up again. There might be a few dips along the way, but the stair-stepper pattern repeats.
Ignore this stock pattern at all costs. It’s incredibly boring because it lacks liquidity and volatility.
I named this pattern the crow because it’s like watching a bird pick off your investment one chunk at a time until there’s nothing left. If you start to see a crow pattern, get out immediately to avoid potential losses.
Using Financial Ratios For Penny Stocks Trading
Financial ratios include things like price-to-earnings (P/E), earnings per share (EPS), and return on equity (ROE). Yes, it’s important to know about these things — but they’re not my primary focus when trading penny stocks.
Frequently Asked Questions About Penny Stocks Trading
What Are Penny Stocks?
Penny stocks are low-priced stocks trading under $5 per share.
Can You Make Money in Penny Stocks?
There are never any guarantees. It’s possible — if you put in the time and effort to... a.) learn the strategies... b.) use proper risk management, and... c.) gain experience over time.
What Are the Best Penny Stocks Apps?
The best penny stock apps focus on information and education. Two solid examples are Profit.ly and StocksToTrade.
How Much Money Do You Need to Trade Penny Stocks?
Depending on the broker you choose, you might be able to start an account with as little as a few bucks. However, I don’t really suggest starting lower than $500 or so. I personally started with a little over $12,000. Tim Grittani started with $1,500. Every trader is different. What’s most important is that you never trade with money you can’t afford to lose.
What Are the Most Common Investment Types?
Stocks, commodities, derivatives, and real estate.
Conclusion: Are You Ready to Start Trading Penny Stocks in 2021?
You made it this far — congratulations! That tells me you’re not one of the fools who just wants to get into penny stocks to get rich quick. Or at least you understand that there’s more to trading than just buying, selling, and becoming a millionaire in a month.
Penny stocks aren’t for everyone. They’re volatile, the companies can be sketchy, and they do present a significant level of risk for you as a trader.
If you’re willing to take the time to educate yourself and scale up slowly, you’ll be taking the right steps to build a strong foundation and working toward trading smarter.
Leave a comment and tell me if you’re ready to commit to your future. How willing are you to put in the work and become a smart penny stock trader?