Buying Penny Stocks (Part 2)

One of the most vital factors in buying penny stocks is to have the right tools for the job. Research and study are vital; I believe that you should be a “student of your craft” if you are really desiring to make a career of penny stock trading. If you haven’t yet picked up a copy of Ted Warren’s book, “How to Make the Stock Market Make Money for You”, I highly, highly, HIGHLY recommend that you do yourself a favor and get it. I put the link to the Amazon page in my sidebar. Yes, it’s an affiliate link—I know a lot of people really get their underwear in a wad about that, but hey, it is what it is. I don’t mind another person earning a small commission if they’ve helped me obtain information that I believe to be valuable. Let me tell you, Mr. Warren’s book is basically my Bible for trading. It does cover the general aspects of technical analysis, but it’s not so technical that it gets ridiculous. Ted Warren’s trading prime was back in the 1940’s through 1960’s, which back then all you really had was the price charts, without a bunch of distracting and primarily useless indicators. Some people really get off on the Fibonacci retracement thing, and others love the MACD (Moving Average Convergence-Divergence), and still others just can’t get enough of the Japanese candlesticks. To be honest with you, I haven’t looked too far into those methods, mainly because my “dumb country simple” method seems to be working just fine, and if it ain’t broke, I’m not going to try to fix it. I hope I don’t sound like I’m putting those other methods of technical trading down…I truly don’t know enough about them to make any type of judgment. What I can say is that as far as your trading methodologies go, the simpler they are the better. Just because something is simple and straightforward doesn’t mean that it’s naïve or underdeveloped. A lot of times we overcomplicate trading—let me tell you right now, trading penny stocks successfully boils down to one thing and one thing only: Finding an accumulation pattern in a stock, which is the sign of a good base being built, with quiet price action in a tight trading range with average volume, and then sitting it out until the stock decides to pop. It never fails. I have literally researched hundreds (probably thousands) of stocks over the past 7 years, and it never freakin’ fails. When you see that pattern of a sideways channel, where prices are “snaking along” in a tight trading range, and for the most part things look uneventful, and volume is just steady and “business-as-usual”, it’s only a matter of time before the stock “pops”. Most of the time the stock will quickly deflate after the “pop” happens, so you better realize when to take the money and run. Anyone who thinks you should invest in penny stocks over the long haul, like Warren Buffet style, will more than likely be disappointed at the end of their 40-year stint. Penny stocks by nature are really meant for the quick-in, quick-out style of trading, with no shame to the game. You have to learn how to have the patience of a long-term investor, but with the mentality of a market scalper.

One thing that I will guarantee to everyone, and I challenge any person to prove me different--you will never find a stock that has done nothing but increased in price since its first shares were issued. There is no such thing as a price chart with a line that just goes up, up and away with no dips or downturns. Even Berkshire Hathaway, with its extremely high price per share, has had downturns. You’ll never see a stock that just keeps on increasing in price…if that were so, you would see some stocks worth hundreds of millions per share. So, by the very nature of supply and demand, and by the nature of price action in general, stocks will always have ups and downs, and these ups and downs are what give us our opportunities for profit. Ted Warren in his book goes into excellent (although sometimes dry) detail about the different phases of a stock, and what to look for in each phase. Not only does he clearly spell out when to buy, and what to look for before you buy, but also what the signs are for selling a stock. Many times we get geeked up because we bought at a good price, and when the stock actually does take off, we’re faced with an entirely different problem—we don’t quite know when to sell, because we don’t want to shortchange ourselves by selling too soon, but at the same time we don’t want to overstay our welcome and end up losing out on profits because we held on too long. I truly can’t say enough about the book; I truly do consider it the Bible of technical trading. If you pick up a copy, I encourage you to study it no differently than you would study a college textbook. Although Ted Warren didn’t limit his investing to stocks trading under $5.00 per share, these trading principles definitely apply to penny stocks just as much as any other type of stock.

When you’re trading using charts, you’ll truly appreciate the value of a book like Warren’s; whether you are a novice or a veteran trader, there is much to be learned from Ted’s experience in the markets. It’s time for me to roll out, but again, keep trading penny stocks!