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10 Tips for Trading Penny Stocks - views
CHARLOTTE, N.C. (Stockpickr) -- Trading penny stocks, or stocks with a share price of less than $5, may appeal to you if you want to avoid paying a high price per share, but be prepared to accept the level of risk. Here are 10 tips to follow if you do decide to take that risk and trade penny stocks.
1. Understand their nature. Penny stocks are volatile, risky and difficult to analyze. It doesn't take much to shove a penny stock right up or right down, and scammers know that. Don't bet the farm. A max of 1% of your portfolio in any one penny stock is a reasonable rule of thumb.
2. Trade them quickly. Penny stocks that pop up usually sell off quickly, and fluctuations happen fast. If the overall trend is up, it can benefit you to trade the volatility in between the moves. But remember that the faster the stock rises, the faster and harder it is likely to fall.
3. Do your homework. Researching the stocks that you are buying is huge for the success in your trading. If the chart looks great but the fundamentals are missing, then you'll have to trade on chart patterns alone -- or choose another stock.
4. Observe the charts. An increase in price of just a few pennies can double the value of some penny stocks. You should know to the penny where to get in and out of a stock, or you shouldn't trade.
5. Ask your wife. Women have killer intuition. Some can know what to do with a penny stock just by looking at its chart. That's why I ask my wife when I doubt myself on a chart. She's usually right!
6. Twitter has many good picks. Twitter is a good place to research stocks to trade and see what other expert traders are saying. Check out how people tweet about stocks and their success rate over time.
7. Paper trade them. Paper trade penny stocks until you understand the volatility and the way that the stock behaves. If the overall chart is good and you measure out how much you want to risk, then take the risk and hold the stock.
8. Don't trade stocks under $2 if you plan on holding them. To make a profit from those stocks, you usually have to be in and out lightning fast. At this level, even if you've done your homework on the fundamentals, the volatility is too high to hold them.
9. Avoid pump and dumps. Pump-and-dump stocks are heavily marketed (as much as million-dollar-plus campaigns) to pump their share price up. The PR campaign organizers will have disclaimers in which they state they are being compensated, such as with shares, to push out the information. False or misleading claims make this an illegal practice. If you do your homework thoroughly, you'll find these disclaimers on high flyer penny stocks quite often. Be very, very careful. These are widow makers.
10. Look for chart and trading volume to sync. Volume is one of the key things that I look for to ensure the stock's move is appropriate. One of the methods I use is to make sure the stock went up two days in a row with the volume gaining or expanding each following day. Example: on day 1, a 5% move with 300,000 shares traded; on day 2, a 3% move with 500,000 shares traded; then on Day 3, buy the stock on an intraday breakout and sell quickly after a spike up for quick cash.
-- Written by Ben Brinneman in Charlotte, N.C.
Trader Ben Brinneman, featured on MarketWatch, Bloomberg and Reuters, resides in Charlotte, N.C., and is the owner of C Squared Trading. Brinneman started his career trading bonds and was an analyst for a wealth management firm. Brinneman and his team at C Squared Trading have taught hundreds in a one-on-one mentorship setting via Skype or live in Charlotte.
You can follow some of their free trades and tips on Twitter at @csquaredtrading.