When most people think of penny stocks, they tend to associate them with being get rich quick opportunities at first, then complete scams once they’ve lost all of their money. Complete newbies will often believe the penny stock they’ve read about and are invested in are the next Apple or Microsoft, and most often what ends up happening is they end up losing most or all of their investment because the stock kept sinking and eventually did a reverse split. Even the lucky ones who buy at the right time and have the potential to sell into a rally often don’t do so because they believe the stock will keep going up, and because they’re greedy they refuse to sell and lock in any of those unrealized gains. Virtually all of the big moves a penny stock will make ends up reversing and the overall trend on most penny stocks will be downwards, so the key is to time your trades and catch them when they wake up, but make sure to sell into the strength and don’t let a winner turn into a loser, which brings me to my next point.
Penny stocks are characterized by having a great amount of volatility, which can and will work for you or against you, depending on your timing. With that in mind, a successful penny stock trader is usually one who not only sells into the rallies, but cuts his or her losses early before they turn into huge hits to their account.
So the basic premise is to learn to time the price action and at least attempt to buy when the stock seems poised to make a strong move, and when you end up guessing wrong and the stock moves too much against you, you cut your losses and bail. Now I guess the only question left is how do you make these guesses? How does one determine when a stock is poised to make a big move? How would one know when and where to cut their losses at so they’re hopefully not selling too early or too late?
The answer is charts, aka TA, aka chart analysis, aka technical analysis. Whatever you call it, it’s a graphical interface with all of the price action plotted in an easy-for-your-brain-to-summarize-at-a-quick-glance manner. Charts aren’t magic and they won’t necessarily predict the future, but what they can do is help to establish structure to the price action. It’s a tool that has many uses depending on the person using it. Maybe you’ll focus on support and resistance, determining where and what levels the buyers have tended to support and what levels the sellers tend to take over and overwhelm the buyers. Maybe you’re an indicator person or like to focus on volume, or maybe you’re some sort of combination of all of those and then some. The fun part about learning to use charts is everyone uses them a little (or a lot) differently than the next guy, so success or failure really is dependent on the user of the tools, not the tools themselves.
Long story short, if you plan to trade penny stocks successfully, you’re going to need time, practice, patience, a plan, method, and tools. You’ll need to learn to walk before you can run, so you’re going to have to go at your own pace and learn by trial and error, though I highly suggest ultimately following the basic path I’ve referenced in this article. Learn to read and use stock charts and combine your methodology with solid money management and remember to stay disciplined in your approach. Trading penny stocks isn’t easy, but if you apply these basic guidelines and stay diligent, you will eventually turn into a successful penny stock trader.
