Penny Stocks: What They Are and How to Trade Them in 2021🥇

Last updated on February 24, 2021
penny stocks

 

Penny stocks are usually small companies. They might be new, they might be in an up-and-coming sector, or they might even be in danger of going out of business.

I’ve made millions trading penny stocks.*

That’s not typical. But I’ve done it, and so have other traders…

Like Tim Grittani, who’s up more than $13 million* in profits…

Or Mark Croock, who’s made more than $2.5 million* in profits…

Or Michael Goode, who’s made over $2 million.* He actually thought I was full of BS before he gave my strategy a try. Now he’s glad he came around!

And this year, several young traders who’ve been through my Trading Challenge hit big trading milestones.*

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 about hard work, discipline, and studying. You have to work for slow, steady progress and small wins over time.

(*Please note: My results, along with the results of these top traders, are far from typical. Individual results will vary. Most traders lose money. These top traders and I have the benefit of many years of hard work and dedication. Trading is inherently risky. Do your due diligence and never risk more than you can afford to lose. I’ve also hired many of these top traders to assist in my education business.)

Table of Contents

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 a lot of 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 more than 10.

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.

Still with me? Good. Hopefully, the get-rich-quick schemers who are too lazy to actually work 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, they could be stocks trading for fractions of a penny, but even a stock trading for $4.95 is still 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 as 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, then buying and holding its stock for years.

Penny stocks are the opposite. The fact is, most penny stocks will eventually fail. But before they fail, they can experience 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 … Here’s one example from mid-February when Kronos Advanced Technologies Inc. (OTCPK: KNOS) spiked over 100% in less than an hour.

penny stocks knos chart
KNOS chart: 1-day, 1-minute candle — courtesy of StocksToTrade.com

As a penny stock trader, my approach relies on finding patterns within these kinds of spikes and taking advantage of short-term price movements in the market.

Remember: these aren’t long-term holdings like blue-chip stocks. The goal is to take advantage of the short-term movements of a volatile market with tight risk management.

Penny Stocks to Watch in 2021

At any given time, there’s a trending sector or two in the stock market.

But since the crash in early 2020, the stock market’s been on fire. Volatility’s been 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 provides opportunities, we’re on top of them.

I made more than $1 million in 2020 — as opposed to about $125K in 2019.*

It’s not because I suddenly got a lot smarter. 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 you understand 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.

You can start your trading journey with my new 30-Day Trading Bootcamp. Trading Challenge moderator Matthew Monaco helped me put this together. Even some more experienced traders 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 go through it at your own pace and repeat it as often as you need.)

Examples of Recent Penny Stock Runners

The crazy market we saw in 2020 is continuing in 2021. We’ve seen SO many crazy runners and OTC stocks have been HOT.

Here are just a few examples of the insane runners we’ve seen in this market…

Ozop Energy Solutions, Inc. (OTCPK: OZSC)

OZSC was a sub-penny stock in January 2020. Then it went on a run thanks to news, a crazy market, and hot sector momentum…

The company is in the power conversion business which got hot thanks to electric vehicle plays. When Tesla, Inc. (NASDAQ: TSLA) had a huge run and stock split in 2020, it created a hot sector and demand for other EV stocks.

That spilled over into battery, charging, and lithium mining stocks.

The stock started running in January after it announced a new subsidiary in the renewable energy market.

I traded it 15 times between January and early February for total profits of $36,928.41.*

(*Please note: My results are far from typical. Individual results will vary. Most traders lose money. I have the benefit of years of hard work, dedication, and experience. Trading is inherently risky. Do your due diligence and never risk more than you can afford to lose.)

penny stocks ozsc 6 month chart
OZSC chart: 6-month, daily candle — courtesy of StocksToTrade.com

Tesoro Enterprises, Inc. (OTCPK: TSNP)

Up until November 2020, TSNP was a flooring and wall covering supplier. Then the company announced a merger with a global payments and financial services company.

The new company’s goal is to provide digital payment services. When they announced the news, the stock was trading around half a cent per share.

Fast forward to February and the company announced a name change and the creation of a block exchange-traded index to offer customers access to blockchain trading markets.

Sounds exciting, right? That’s exactly the kind of hype I want to take advantage of in my trading. Do I believe it — nope, of course not. But I’ll trade the price action and my patterns.

Check this out: The beginning of the stock’s run started at half a cent per share and rose to a high of $1.93. That’s a 38,000% increase in price.

But I don’t buy these stocks and hold. I buy morning spikes and breakouts on the way up and morning panic dip buys on the way down.

I traded the stock 35 times between November and mid-February and made profits totaling $125,834.45.*

It’s a good example of how I use a process I’ve developed over 20+ years to trade stocks in hot sectors with hyped-up press releases.

penny stocks tnsp 6 month chart
TSNP chart: 6-month, daily candle — courtesy of StocksToTrade.com

MedMen Enterprises Inc. (OTCQX: MMNFF)

Here’s another example of a stock in a hot sector.

MMNFF is a cannabis producer based in the U.S. In early February weed stocks were running thanks to Biden’s election and after several senators commenting about the need for legislative changes for marijuana.

Marijuana stocks could gain more momentum if legalization picks up for steam, but this chart is a good example of what happens after penny stocks get too overextended.

This is why I don’t hold penny stocks … And there are a ton of examples of stocks just like this with lessons in my “Pennystocking Framework” DVD. Get it as a bonus with my 30-Day Bootcamp.

penny stocks mmnff chart
MMNFF chart: 6-month, daily candle — courtesy of StocksToTrade.com

Is It Illegal to Trade Penny Stocks?

If everything you know about penny stocks came from movies and TV, 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 many 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.

The SEC’s Rules for Penny Stocks

The SEC’s rules for penny stocks vary depending on where a stock trades.

Listed stocks (NYSE, Nasdaq, etc.) have strict listing requirements, including financial filings and reporting any material changes that affect the business or the stock.

Stocks trading on the OTC markets don’t have as many requirements — pink sheet stocks have none. That’s why it’s a buyer-beware market. And it’s why I get in and out of trades on these stocks quickly. I don’t invest in penny stocks and I never hold and hope.

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 they could experience some huge spikes before they fade into oblivion.

Once you recognize that most of these stocks will fail, you can learn to trade like a sniper.

There are two key ways to trade penny stocks: long or short.

Going long: In spite of the term, “long” in my trading strategy usually refers to a short-term, buy-and-sell trade. 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.

Going short: This means short selling a stock. As a short seller, you operate under the belief that the price will drop.

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, working hard, and waiting for the right setups.

(Sign up for my no-cost weekly watchlist here.)

Truth: for me, trading penny stocks was about getting rich … at first. And I’ve made over $6 million trading these sketchy stocks.

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. Now I donate all my trading profits to charity. And these days, I get the most joy from 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 and in an up-and-coming sector. Some might even be in danger of going out of business.

This part’s 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 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 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.* 

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 probably aren’t 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.

supernova placement

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. For example, never invest more than 10% of your trading account on a single play. If you have a small trading account, maybe 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” for no cost. 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…

Stockbroker

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.

Stock Screener

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…

Charting Software

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?

Trading Plan

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 from a rise 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 highest 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 OTC Markets. 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.

Mostly, you want a reliable broker that will be able to execute your orders, and that has the stocks and services you’re looking for. I know a lot of people use TD Ameritrade, Schwab, or Robinhood.

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 pattern day trader (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. Designed 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.

Even if they’ve based them on my teachings, they still took the time to adapt and develop their own strategies. They’re all self-sufficient. I provided the training wheels, but they’re off now.

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 a trading journal. It’s one of the most important tools for any trader. In it, you’ll record every trade you make as well as your observations and 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, stay safe, and be 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.

It’s up to you to do 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.

The Challenge has everything you need … interactive webinars with me and my top students … more than 7,00 video lessons … access to my incredible chat room, where students and I alert and share…

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 constantly look to the past. It’s how I try to 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 it’s even more important that you understand them. This 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, you have to consider key indicators to determine how a stock might perform in the future.

‘Indicator’ can be a pretty broad term. It refers to any sort of flag that can work for or against you 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 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 Watch 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

Learning how to read chart patterns can make you a better trader. Moreover, you’ll begin to understand how stocks behave in specific market conditions.

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 of a stock’s momentum and how it’s performed in the past.

Chart Types

The four most common types of charts are:

  • Bar
  • Candlestick
  • Line
  • Area

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.

Clean Bullish

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 higher 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.

Clean Bearish

A clean bearish chart is the exact opposite of a 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 at 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.

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.

Messy Stock

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.

Messy Breakdown

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

The Supernova Penny Stock Chart Pattern
DGLY supernova chart: 3-month, 1-day candle — courtesy of StocksToTrade.com

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

The Stair Stepper
MPNGF stair stepper chart: 6-week, 1-hour candle — courtesy of StocksToTrade.com

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.

The Snore

The Snore
HUYA chart: 1-year, 1-day candle, the snore — courtesy of StocksToTrade.com

Ignore this stock pattern at all costs. It’s incredibly boring because it lacks liquidity and volatility.

The Crow

The Crow
BTU chart: 1-year, 1-day candle, The crow — courtesy of StocksToTrade.com

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.

Here are 13 penny stock chart patterns I think you should know.

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 stocks that trade for $5 per share or less.

Can You Make Money in Penny Stocks?

There are never any guarantees. Trading these stocks takes hard work. 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.

Can You Get Rich From Penny Stock Trading?

I’ve made millions trading penny stocks and several traders have become millionaires through my Trading Challenge.* But our results aren’t typical and nothing’s guaranteed. It won’t happen overnight. These top traders and I put in years of hard work and thousands of hours studying the markets.

Is It Difficult to Sell Penny Stocks?

Selling a penny stock position can be difficult if you’re stuck in an illiquid stock. That’s what I never recommend students trade stocks with low volume.

What Are the Best Penny Stocks Apps?

That depends on your needs. I recommend focusing on information and education. Profit.ly is a solid example. You can also use StocksToTrade every day to help you find the hottest opportunities for your strategy.

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. Every trader is different. I personally started with a little over $12,000. Tim Grittani started with $1,500. Never trade with money you can’t afford to lose and focus on your education and the process.

What Are the Most Common Investment Types?

Stocks, commodities, derivatives, and real estate.

Is Robinhood Good for Penny Stock Trading?

I personally wouldn’t use Robinhood for trading penny stocks. It has restrictions on certain stocks, like many OTCs. But only you can decide the best broker for your needs. Do thorough research to find one that best suits your market approach.

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 looking 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.

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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?

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