Showing posts with label Stocks. Show all posts
Showing posts with label Stocks. Show all posts

How to Day Trade or Swing Trade Penny Stocks

Latest update: January 19, 2021. Page URL indicates original publication date; meanwhile, times change and the updates continue.

Penny OTC Pink Sheet Stock Day Trading

The number one rule is that penny stocks sell for a penny or less for a reason, mainly because they are indeed all absolutely worthless junk. Basically, they are dead stocks that refuse to die because of players like us.

And be advised that if you are looking for action, trading in the penny stock market is not the place. In fact, of all the different ways to play all the different markets, the penny stock market is truly the most boring and most dangerous of the lot.

The game one is playing is as follows:
  • One is a sucker that is looking for an even bigger sucker.
This is a game that can actually be won. Just don't bet the farm on any single trade and being patient is the main requirement. A healthy dose of fear and paranoia is also a good idea. Boredom has also been the downfall of many a trader, usually the result of a reckless trade made out of frustration.

It should be noted that the phrase, "penny stocks, actually is the definition for stocks selling for $5 and less. However, there are penny stocks that actually sell for $00.0001 a share; yep, at that price one can buy a million shares for $100; odds are you will lose the $100 or at least lose whatever commissions you paid to get in and then bail out.

An important note about the day trading rule. If a person buys and sells the same stock on the same day, the SEC and the brokerage firms calls that a day trade. If a person does that four or more times within any consecutive five business days, the person is then classified as a day trader. The SEC and brokerage firm will then immediately freeze your account for the next 90 days, until you put a minimum deposit of $25,000 or the equivalent value in stocks into your account. This law was created several years ago to supposedly protect investors. I will reserve comment on that. This absolutely applies to all margin accounts. There is conflicting information as to whether this rule applies to cash accounts or options trading.

Meanwhile, Here Is How to Play the Junk Stocks, Penny Stocks, OTC Market

  1. Find a broker that doesn't charge monthly fees. You want a broker that only charges commissions for actual, completed transactions.
  2. Find a stock screener that is actually willing to find and sort out these kinds of stocks. If your broker has that, all is well. Otherwise you will have to search for other websites.
  3. Sort the screener by the day's trade volume, you want to find the currently highest activity stocks. When you do see the stocks with high activity for the day, also note what the trading volume of the stock has been in the past; you don't want to end up with a stock that was a corpse last week and will be a corpse again next week.
  4. Next is to check the trend for the last several months. If the trend is down, forget it. That stock isn't going to turn around just because you bought it, trust me.
  5. Next is to check the bid and ask; this applies to both the price and the quantity. If the prices are in your range and the day chart is bouncing back and forth between the two, you may have found an opportunity. This is a good time to do a general search for the stock symbol and/or company name to see if there is any news.
  6. Never buy at the market price or ask price. With penny stocks, that's pretty much a recipe for disaster and you will end up with a loss. Always place a limit order at the bid price. Then it is a matter of sitting back and waiting; it could be hours, days, even a month. Meanwhile, one still has to periodically monitor the stock to be sure it remains at least semi-actively traded. If the trading volume significantly drops or the bidding pool significantly drops, it is time to withdraw your order. Also periodically do the general news search as before.
  7. We will presume that one eventually gets lucky (or unlucky) and the limit buy order is filled.
  8. Unless there is a sudden news break concerning the stock or industry, time to immediately place a limit sell order at the ask price.
9. Your main objective at this point is preservation of capital. If any of the following occur, change your limit sell order to the bid price and get out. Your only loss will be the commissions.
  • You notice large blocks of stock periodically hitting the bid price and being sold.
  • You notice the amount of shares at the bid price is gradually dropping over time.
  • Volume starts dropping over time.
It cannot be emphasized strongly enough the importance of these three rules. Failure to abide by them will inevitably result in a significant loss. More than likely when you notice any one trend starts to occur, all three trends will become evident fairly soon.

10. While one is watching and waiting, hopefully someone comes along and fills your limit sell order. If this happens in hours or even a few days, it might be worthwhile to do it over again with the same stock. If it takes more than a week, then you were very lucky your order was filled and should probably move on to a different stock.

Final Thoughts

I would guesstimate that 97% of all penny stock trading activity are either by scammers or fellow day traders; the remaining 3% comprising the innocents. The innocents are easy to spot; they are the ones buying at the ask price.

- End of Article -

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