First I want to start of by discussing what Penny Stocks are. Penny Stocks are common stocks that trade under $5.00 per share and they are commonly associated with penny stock scams. They are listed on the AMEX, NASDAQ and NYSE but more commonly associated with pinks or over the counter. They are highly speculative in nature and carry extreme amounts of risk. I am going to go over some of the pitfalls about trading penny stocks and how you can avoid some of the mistakes others make.
1. Stay on Top Of the Pumpers
It is very important to know what stocks are being pumped. You can follow these and see if there is something there but we try to stay away from them. You have to know this because pumped momentum in intra-day trading only. This kind of momentum will rarely carry into the next day. I don’t even like swing trading penny stocks too much unless there is a fresh breakout that I have an alert set. I will usually run a search in my email with the ticker to make sure the breakout stock is not being pumped. Once I do this and find out it is not being pumped I will try to open the trade and hold it for a couple of days. The reason you must make sure the breakout stock is not being pumped is because a pumper can cause a false breakout and you will often find the stock popping and dropping below the original trading range.
2. Get in and Get out, Don’t be Greedy
This is very important when you are trading penny stocks. You have to get in and get out and not get too greedy. Penny stocks are not for investors. They are for traders looking to make quick money. You must know that you will never catch the entire move and you have to understand that you will probably watch it go up after you sell, but that is okay if you locked in profit.
3. If you choose to invest do your research.
If you are going to invest in these try and stay away from the otc and pink sheet stocks. There are very minimal requirements to be listed over the counter. For this reason it will be hard to find information and the majority of the time the information you find will not be accurate. If you stick to investing in penny stocks that are listed on the AMEX, NYSE or Nasdaq you will be able to rely on the information you find. I try to stick with stocks that are trading between $1.00 and $5.00. I usually look for a stock that is anticipating some major news and profit on the anticipation by selling just before the news comes out. This is the safest way to invest in penny stocks.
4. Find a Legit Source of Information
I think it is very important to find a legit unbiased source for Swing trade stock picks. If you can find a company that is not paid it will only benefit you better since you can rely on the information they are giving. Stock promoters will usually say whatever they have to in order to get the price of the stock to increase, only so they can unload their holdings which in turn causes the price to crash.
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