The Best Penny Stock Strategy

The Best Penny Stock Strategy

The single biggest question I get is, “What are the best penny stocks to invest in right now?”

While that is an important question, the real problem most penny stock pick investors have is that picking a penny stock does not make you a successful trader of penny stocks. I am going to go over one of the best penny stock strategies that I know of for a newer trader. We are going to pretend for a moment I am writing “Penny Stocks for Dummies,” but I’m not. This is a quick way to moderate the risks of penny stock trading. 

First the warnings: You’re going to lose much more than you expect when you buy penny stocks. That’s because many of these companies are not particularly competent or truthful. Others are underfunded and don’t make that obvious on a daily basis. And a few are outright frauds, although they do everything they can to pretend they are not. 

I am going to assume the following:

  1. You total trading budget is about $5000.
  2. You’re prepared to lose that entire budget and not be negatively affected. 
  3. You open a trading account at a online discount broker where you will make most of your trades. 
  4. You don’t pick your stocks at Ihub, Twitter, spam emails or other strange sources of “stock picks.” Instead you will learn to screen for your picks yourself. 
  5. You don’t fall in love with your stocks. 
  6. You understand you’re not a “pattern day trader” that will require assets of no less than $25k on deposit at most brokers. Instead you will be trading generally on fully settled funds. A pattern day trader buys and sells and uses money that to the brokers is “unsettled.” That means that they classify you differently. Ultimately to stay a regular trader you have to follow the rules of that broker and limit your trading on the same money. Each broker is a bit different, but four or more trades in about five days gets you classified as a pattern day trader most places. If you do it all on “settled funds” you are less likely to get that status. 

Divide and Conquer: 

Divide your $5000 into about four equal parts. That means spend about $1250 per stock choice, including with fees. Make one pick about every three days at first. You don’t want to go too quickly as to get designated a pattern day trader. You also want to learn how to watch a stock you hold. The next step is the biggie: Screening for a penny stock. 

Using a Stock Screener as Your FIRST & ONLY Sources for Initial Stock Picks:

It is so easy to do Google searches for the “best penny stocks” or “penny stock lists.”  The SEO writers at penny stock websites want hits and only hits. They don’t want you to succeed as they likely are not even in the US and likely have never bought or sold a penny stock – or any other stock for that matter. Don’t use such sources. 

I’m going to show you how to use the screener at OTCMarkets.com. Note that OTC Markets IS the exchange for most over the counter stocks (also known as penny stocks) in the United States. This is not some “stock picking website.” This is the market. 

 

Basic Choices to pick on the Screener:

  • I choose ONLY fully reporting stocks. I want US based stocks, too. The best choice for the MARKETS downdrop menu is OTCQB. These are fully reporting companies that are primarily listed in the United States. 
  • In the SECURITY TYPES selector, choose “Common Stock.” Don’t choose “Foreign” as there are different issues with different countries. 
  • In the COUNTRY selector, Choose United States.  You can also click Canada if you like as well. I would stop there.
  • Ignore the INDUSTRY selector, as that offers too few stocks per choice. The default selects them all. 

 

Growth is a Key on the Screener:

  • For the initial screening, you decide what you want to see in a stock. These are penny stocks. I want to know how well they’ve done in the past 13 weeks, so that is the choice. You’re not going to be holding these long term, so comparing a year ago isn’t necessary on the INITIAL screening. Later you will see how the entire chart history looks.  
  • I am choosing that these stocks be up at least 15% in the past 13 weeks. 
  • Volume is irrelevant because many penny stocks are so low in price that they trade millions per day. 

 

On the “PERFORMANCE” on the Screener:

  • Choose S&P 500 for the comparison. Don’t use the default, which is a composite of penny stocks. 
  • On the slider choose 0 to >40%

 

Interpreting the Results:

You will learn what each selection does the more you do this. These are the basic parameters I use to make sure that a stock I am looking at is not a total dog. In this particular set of selectors today (April 14, 2017 as I do the example) I get a total of 71 stocks. I already see a dog or two on the results that I know should be tossed out. That’s from knowing about the companies. Click the “Download Data” to get the results in a spreadsheet you can use. 

 

What to “throw out” from the list:

  1. All banking stocks. Forget about them all. They are on the OTCQB for other reasons. They don’t typically day trade well.
  2. Throw out stocks that you find traded very little dollar volume for the past week or two.  If very little money trades, then when you buy you’re going to drive the price up. When you sell, you’re going to drive the price to nothing and lose bit time. My rule of thumb is that it needs to trade about 25 times per day or about 100 times per week the dollar value of the position I am likely to buy or sell? 
  3. Throw out stocks that trade below $0.15 (fifteen cents) and throw out stocks that trade above $3. We want to stay in the category of “penny stocks” without the risk of trading “sub-penny stocks” which are ALWAYS bad. 
  4. The stocks I said I would throw out as “dogs” were eliminated by the items 1 through 3 above. 

 

Research These Companies Two Ways:

  1. Technical
  2. Fundamental

 

Technical Research is when you look at the chart. (Always do this first, before fundamental!)

  • If the stock is up about 90% from a low for the past year, throw it out. It is too volatile? It might also currently be a “pump and dump.”
  • If the stock had a bunch of days where it did not trade for the past six months, throw it out!  More than 15% of the days with ZERO VOLUME in the past six months means this stock is either promoted or otherwise manipulated currently to make the screener. 
  • If the stock has had a reverse split in the past two years, throw it out. (Look these terms up if you do not know them. Knowing about reverse splits is critical to trading penny stocks.)
  • There are more technical items, but these are for screening. That’s throwing potentially bad stocks out. 

 

Fundamental Research is looking at the business the company is in, the press releases it puts out, the SEC filings the company files and how solvent the company is. 

  • Start with the SEC filings. Is the company current on its SEC filings? To make this list, most likely they are. But – sometimes they have just filed a notice that they will be late. 
  • In the latest 10-K (annual SEC filing) or 10-Q (quarterly SEC filing), find out if they have enough cash on hand. Many will have a warning that if they do not get funding, they are screwed. Some say this warning is on “all penny stocks.” That’s not true. 
  • Are they being sued? Is their technology or patents being challenged by anyone? 
  • Look for Form 3 and Form 4 filings to see if the major shareholders, insiders and company executives are buying or selling.
  • Read the Company press release with a grain of salt. Know that these are designed to tell you everything is great with spin (in most cases) while not stressing the risks. 
  • Read message boards such as Ihub sparingly. You want to know what is wrong with the company, but don’t get on these boards and get obsessed. These people are trying to manipulate the market is most cases. Some boards have “special relationships” with the company and delete negative posts. Some moderators hate specific companies and delete the positives. 
  • Call the company on the phone! Do they live answer the phone? Do they ever call you back if you leave a message? Do they sound like just a cell phone voice mail? All of these are things to note. 

 

Now from this list pick one stock. Watch that stock a few days. Look for an entry point. 

Once you choose a stock and pick an entry point, place a buy order in the night before. Make sure you understand how much it is going to cost. Make that a LIMIT ORDER with a specific price to buy at. You should choose the lower part of the prior day’s trading range. So if it traded between $0.50 and $0.60 the prior day, put the order in at $0.50 or close to it and don’t change that price even if they buy never happens on the day you put it in. Make that a DAY ORDER, as well. You don’t want to have it filled partially one day and partially the next day. 

 

My Number One Trick Nobody Else Does:

As soon as your buy order is confirmed, put in a LIMIT SELL ORDER / ALL OR NONE / GOOD TIL CANCELED at a price that gives you the profit you want. You do that right after you’ve bought the position. Why? Because you are wanting profit. Once you have profit, take the damn profit. 

So in the prior example, let’s say you want a 20% gain on your money after all trading fees are priced in. So if you  bought at $0.50 plus the cost of trading in and out of the stock, let’s say you’re desired 20% actual gain comes at $0.62.  You put in a SELL ORDER as a LIMIT ORDER for $0.62 per share. You put that in as ALL OR NONE, meaning you don’t get a partial fill of that order over a couple of days which might make your fees higher (depending on the broker). All or none means that either the entire position sells, or no sell order executes. The Good Til Canceled means that the order will not be canceled until the order is executed and you get your profit. (Or if it goes down, you end up canceling the order.)

This strategy catches stocks when they spike up in a day and go back down. You’ll be one of the few that get out of it at a profit that day. 

Good luck!

 

Logo Header Menu