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!

Buying Penny Stocks

This whole business of penny stock trading is really quite simple, if (and ONLY if) you approach the markets with a trader’s mentality, not a gambler’s mentality. In a lot of ways, being a good trader is like being a good poker player; you have to realize that you’re going to fold way more hands than you’re going to play. It’s just the way the probabilities play out. But if you keep this in mind and learn to expect it and accept it as simply part of the price of playing the game, you won’t get frustrated or discouraged when every single trade doesn’t go your way. You have to have the mental fortitude to watch your first 10 trades go to pot, while still sticking to your trading plan even when it looks like you’re going backwards. This is vitally important. You have to learn to trade by principles, not by feelings or emotions. The one thing that can really trip you up in this trading game is when you start getting an ego or thinking that somehow you can “bully” the markets into doing what you think they should do. And when I say “bully”, I mean doing things like adding to your position when you’re already losing, or continuing to dump money into a position that’s obviously going south. All of this stuff is completely in vain. You’re never going to be able to get the market to do what you think it should do; you have to look at what the market is currently DOING, and base your trading style around that. The market, as volatile as it is, is really the constant, and we are the variables. We can’t sit here and say that we’ve gotten our butts kicked by the markets, when really it’s a case of us kicking our own butts by not responding properly to what price action the market was offering us. When you truly begin to understand price action, you will really start to see the value of letting the markets be the markets, and quit trying to bring ego into the equation. Ego will be your worst enemy, because you will begin to turn blind to plain old common sense, and begin these little “vendettas” against the markets after you have a couple of losing trades. Dude, here’s the deal…when the trade goes your way, take the doggone money and run, and when you’re stuck with a loser, learn your lesson and get the heck out of the trade before you try in vain to salvage something that needs to be cut off. As the famous adage goes, “cut your losses and let your winners ride”.

Let me tell you something right now: There are traders who trade faithfully by certain indicators, such as the Simple Moving Average, or the Williams %R thingy, and get consistent good returns that way. But at the same time, there are also very successful traders who literally enter and exit the market at random, but keep a very tight rein on their capital management. The key in all things is capital management—how much you are going to risk in any one trade. This was one of the hardest lessons I had to learn early in my trading days was how not to blow my entire account out on one trade. Once you learn how to trade with more than a gambler’s mentality, you won’t try to hit a “home run” with every single trade; you will realize that enough base hits will earn you the home run anyway, and the monetary effect is still the same. Traders who know how to do this right will normally only risk about 1% of their total trading capital on any one trade. This way, if the trade goes south, they are still operational with 99% of their trading capital intact. Another way to look at this is, you would basically have 100 chances to make a successful trade if you’re only risking 1% of your total account balance on any one trade. This beats the heck out of “betting the farm” and potentially only getting two chances to even place a trade. Now you tell me—who has a better chance of pulling off a successful trade—the guy who makes 100 attempts, or the guy than only makes 2 attempts? This is the main reason why you don’t “risk your whole wad” on one trade. Believe me when I say, opportunities to profit in the markets come around all the time…there’s truly no shortage of trading opportunities in penny stocks. The real question is, will you be ready when the opportunity presents itself? I have often heard that “success is when opportunity meets preparation”. Let me emphasize that part of your preparation as a trader is going through enough dumb decisions, losing trades, hurried trades, and other novice mistakes to finally get to the place where you calm down and realize that you will simply have to trade with a set of principles that you stick to and don’t deviate from AT ALL. That’s one of the reasons why I started Trading Penny Stocks Online in the first place, was to hopefully cut the learning curve for some of the newer or novice traders out there. Believe me, I’ve been through every trading phase you can go through. I have dug so deeply into technical analysis that I couldn’t hardly see the price chart anymore due to the plethora of indicators I had overlaid onto it, and I’ve read all kinds of trading journals and magazines and articles, and I have tried to make this thing as complicated as I could so that I could think I’m doing something really sophisticated. But at the end of the day, and after years of ups and downs and positive & negative experiences, I finally have settled in my mind that I just need to be patient, and stick to the simple things that work, versus the complicated things that have the appearance of working, but are really just a bunch of hot air.

So what can you glean from Trading Penny Stocks Online? Why even read this? Mainly because I have included a simple but effective trading methodology for recognizing price chart patterns that will narrow down the penny stocks to buy versus the ones to stay away from. If you use this simple method, I can almost guarantee that you’ll have winning trades that will more than make up for your losing ones.