Trading Penny Stocks - High Risk Equals Big Profits

By Clint Chapman
Ideal Investing & Consulting, LLC

The definition of a penny stock is any stock that is trading under the price of $5.00 per share.  These stocks are high risk to trade and usually move based on speculation.  However, if you can find the right ones to trade they can be very profitable.

The best penny stocks to trade are the OTCBB (Over the Counter Big Board) and the Pinksheet stocks.  This is because stocks that trade in the major markets (NYSE, NASDAQ, etc.) are most likely stocks from companies that are losing money or have little growth potential.  Also, OTCBB and Pinksheet stocks are most likely newer companies developing a product and once they are established they will move to one of the major markets. 

When screening for a good penny stock to trade you should look for positive single day movers with higher than average volume.  Make a list of 10-20 socks you find like this and than start looking at what the company does.  Look for companies that are developing new technology or a product that is innovative such that their competition will be minimal, if any, when their product is lunched or implemented.

Besides looking for good companies to trade you can also look for good charts to trade.  Look at short-term (1-month to 3-month) and long-term (1-year to all data) charts to find the overall direction that the stock is trading.  Do not try to fight the overall trend; a stock that is in a long-term downtrend is likely to continue down.  You are looking for steady uptrends and predictable patterns.  Steady uptrends are the easiest and best ones to trade.  Draw two straight lines that go through most of the peaks and valleys to find the trading cannel.  Buy the next time the price hits the bottom line and sell when it nears the top line.  A nice predictable pattern is the “N” pattern.  Trade this pattern when you find an indicator that it is about to move back up.  A good indicator is a Doji candlestick, which is a trading day with a tight range and opens and closes at, if not exactly at, the same price.  Another good indicator is after a big down day the price closes at or near its low and than opens there or higher the next day and close higher.

Because penny stocks are high speculation plays you should be getting in and out as soon as you realize some good profits.  If you get lucky and can take a 30-40% profit in one day you should take it.  After a move like this the stock is liable to comeback 15-20% the next day.  If you still like the stock you can get back in and make an even bigger profit than if you were to just hold it and it moved back up.

Trading Penny stocks can be exciting and profitable.  Always remember that these are high risk stocks to trade and never put all your money into just one stock.  Do your research into the company after you find interesting charts to trade to save time.  Search penny stock blogs and forums to find ones with a lot of chatter and never rely on someone else’s pick, do your own research.

To find more information about trading stocks including secrets to finding explosive moves before they happen, go to http://www.ideal-investing.com.  Here you can get all the tools needed to become a successful independent investor.

About the author:  Clint Chapman is the President of Ideal Investing & Consulting, LLC and is a active trader in the stock and currency markets with 8 years experience.