Trading Penny Stocks: Not Nearly as Hard as You Think

In the arena of trading penny stocks online, there’s a lot of hype and hubbub, some of which can be validated, and some of which just sucks. Many investment advisors, stock newsletter authors, market pundits, and so forth want you to believe that making money in the stock market is some elusive enigma that the “common man” simply cannot decipher. I’m telling you right now, it’s actually one of the easiest avenues for wealth creation that exists, IF you know what you’re doing.

The test that most people fail is the test of simplicity. They’re looking for some mega-complex methodology with thousands of charts, indicators, prognosticators, and basically everything in the investment bag of tricks known to man. Truth be told, penny stock investing really doesn’t require a whole lot of mental gymnastics, just some basic understanding of chart patterns and a little bit of guts, or chutzpah, or whatever you want to call it. Simply put, you cannot be fully risk-averse and expect to do well in the markets. You will get slaughtered, and the interesting thing is, you’ll be slaughtered by your own lack of patience and your own emotional ties to money. But…that’s another subject for another time.

Please be advised that I do NOT consider myself, nor purport myself to be ANY kind of financial advisor, or investment advisor. I’m just a guy that failed enough times in the markets to finally understand how they work. This is why I say, if you can’t stand the “sight of your own blood”, so to speak, or in other words, if you can’t stand the thought of losing money, DON’T get into the markets. You will SUCK at trading penny stocks (or any other type of stocks for that matter) if that’s your attitude. This does come with an unavoidable level of risk, and if you are not mentally ready for that risk, then it’s better to leave it entirely alone altogether.

I have traded (and do trade) in what is considered to be one of the most risky areas of stock investing known to man—the OTCBB (Over the Counter Bulletin Board) stocks. These stocks, along with the Pink Sheets stocks (I’ll explain them in another post), are widely considered to be the “Wild West” of the stock market investing world. I don’t recommend them to the stark newcomer—you have to develop “nerves of steel” to some degree to withstand the pressure and volatility that can come with this class of stock investing. Stocks in the OTCBB arena often get de-listed, or trading for the stocks can be halted, or delinquent filings for the SEC get reported, so there can be quite a bit of shady activity driving the prices of these stocks. For those that do not understand how to trade using price charts, this can be a major mine field, but for those that have a good working knowledge of how to trade based on chart patterns with a high probability of success, it’s a world of opportunity.

You really only need to look for two main things with any penny stock you happen to be zeroing in on: Number one, look for a stock whose chart displays price action that seems “dead”—what I mean by that is, there’s a long period of time where the stock’s price trades within a fairly tight trading range…this will all be based, of course, on the price of the stock, and can better be measured by a range of percentage of the price instead of just the actual “tick value” itself. For instance, a tight trading range for a stock that’s trading at $0.25 a share could be anywhere between $0.20 and $0.30. Think about it: If the stock is trading at 25 cents a share, five “ticks” up or down adds or subtracts roughly 20% to the value of that stock. So a move down to $0.20 means that you have a 20% loss in the value of the stock, and a move up to $0.30 means that you have a 20% gain in the value of the stock. These are actually huge percentage swings, but in the world of penny stock investing, this is somewhat the norm, and could easily be seen as a tight trading range.

Unfortunately, I have to run, because I have some personal business to attend to, but this time I actually will pick up where I left off and give you the other primary thing to look for when you’re looking to buy penny stocks. Stay tuned until then...