A lot of people hear about penny stock trading, but have no idea how to get started. These are the lessons that it took me many months to learn.

Every year there are stocks that go for monster gains. I’m not talking about the 200-300% gainers, but the 1000-10000% gainers. You know the one that everyone is still talking about. It is the stock that every penny stock trader dreams of taking to the bank. The longer a penny stock stays in the spotlight, the worse. There is always a good reason for why a penny stock is trading on the OTCBB or pink sheets. This is especially the case if it is a subpenny company. You always hear people claiming that they’ve found the next winner, the next Microsoft, Apple or Google. All the newbies believe the story, but as you become more experienced you’ll quickly discover that most companies have something wrong with them that won’t let them succeed. The longer a company stays in the spotlight, the more bashers and shorters it will attract. You’ll see people posting fake information on forums and you won’t be able to decipher fact from fiction. You’ll see other penny stock trading folks screaming dilution and in most cases they are telling the truth. Then you’ll see so called longs telling everyone to hold. When you start seeing these people, it’s usually a sign that it’s time to leave. In fact, one of the greatest penny stocks every, SPNG – Spongetech, even had products in Wal-Mart, sponsored NFL teams and ended up being a complete scam.

Penny Stock Trading

It’s hard to see but on March 17, 2009 SPNG is trading at .0006 and on June 12, 2009 it hits a high of .285. So for every $1000 invested you have gotten $475,000 if you had sold at the peak. This changed the lives of many penny stock traders. This penny stock was profiled on countless penny stock newsletters and penny stock picks websites and really surged due to its impressive story. Stocks like these are one reason to join a few of the hotter penny stock newsletters.

Always take your profit. I learned this from one of my mentors, Tim. Some profit is always better than no profit or a loss. In fact, you never know when your next lunch is coming. If you want to win in the OTC, take profit too soon rather than too late. It will make you feel good knowing that you’ve made bank. Sure, others will hold for the peak, but I promise these guys won’t be around for more than a year. They can’t consistently win. Pigs get fat, hogs get slaughtered. I realized I was getting greedy when I held too long. If you are a technical trader, take your profits when the price is outside of the Bollinger Bands. This is one penny stock trading tip that helped me become a much better trader.

There is always someone with shares to sell. If you think you got in at the bottom, you are wrong. It doesn’t matter, there is always someone that got in lower. Maybe it’s the $100,000 private placement from 5 years ago. Maybe it’s the promotion group running the stock. Heck, it most cases it’s the CEO of the company and its officers selling their shares or diluting more shares into the market and you can bet they didn’t pay full price. When you see dumping out of nowhere, it’s time to sell. Realize most CEOs are scumbags! This is Penny Stock Trading 101.

Keep your group rich. As you begin to network, you’ll make friends and enemies. The key is to keep your penny stock trading group rich and liquid, so that you can maintain buying pressure. You’ll find that as soon as something goes wrong, people start to point fingers and blame others when it was really out of their control. When you see pumpers on your stock, take advantage of it, and don’t get caught holding the bag. One bad play and your group could lose half its money, another bad play and your group is broke. You need to quickly figure out who are your friends and who is pretending to be your friend for their own agenda.

Shorting. If you see someone talking about shorting shares or bashing for no reason they are probably shorting the stock. You’ll start seeing longs saying I should be adding to my position. This is exactly what the shorter wants, as he will break the buying group and then cover a month later. You’ll also see people saying shorty is going to get burned, but ignore them. The short almost always wins in penny stock trading, especially when it is the market maker.

Paid bashers do exist, just like paid promoters. Sometimes people legitimately get burned by a company and they don’t want to see that company pull one over on the next group of people. This doesn’t mean you still can’t make money as many penny stock companies run annual promotions to raise funds. Other times, trading groups will have had bad blood between one another and they might hire someone to bash the other groups stock. You’ll also see these people digging up anything negative they can find on the penny stock company. Remember people don’t sit on forums and talk trash all day without getting paid.

Share Structure. Be sure to always call the transfer agent to get the latest share structure or to find out if it is gagged. Sometimes if there is a low float, it is easy for a stock to run up with a little buying pressure, but it can come crashing down just as fast. This is because the market makers don’t have enough shares to meet the demand. Remember the market makers will start shorting to fill the demand and then will try to crush the run to cover. Always try to determine the Authorized Shares, Outstanding Shares and Float, if possible. The best time to call is during penny stock trading hours.

Don’t chase a running stock. It is always tempting to jump in and buy a penny stock after a big movement hoping that it will continue going up. The best thing you can do is wait for a pullback in the chart and get some shares on the bid. Then load up on the dip and then flip out when buying pressure comes back. Be sure to take a good look at the penny stock trading company’s recent PRs and see if there is any reason for it to continue going up.

Amateur Hour. This is the first hour of the trading session where all of the pros are selling their shares to the newbies who got a penny stock trading alert in their inbox that morning. You’ll see people dumping to move into a new position because they are impatient. You’ll see 30% pullbacks. These are all reasons to sell at the opening bell and then reload around lunch. Another great time to buy is right before the start of power hour, which is the last hour of trading. This is especially true if the stock has had a good run, and then trading has slowed a little bit. Always make sure there is a catalyst that people are waiting for. Then when that PR hits or if the share price slumps start selling.

Learn from your mistakes. Mistakes happen and you will lose money. This is inevitable in your penny stock trading career. In fact, you will probably lose a lot of money before you start making money. Be sure to correct these mistakes quickly and learn from them. Analyze and determine what went wrong and what you could have done differently in the situation. One thing I’ve learned is the chart never lies, but CEOs do.

Everyone has an agenda. People either want the stock to go up or to go down and the information they provide about a stock will reflect that. They might be in at .04 and want to exit at .06. Meanwhile they are telling you to buy at .05 and saying it’s going to go to .10. Be sure to always do your own due diligence and don’t get dollar signs in your head. Someone might also be alerting a penny stock because they are stuck in it and they want to get out.

Don’t let your emotions get the best of you. If you can trade without emotion you will do better. You will be able to execute a bad trade and then be able to rebound with a multibagger. Keep your confidence high. If it gets low, put on a trade and take 5-10% just to get you back on track. Don’t let your emotions tell you to buy or sell a stock, use your judgement in penny stock trading.

People lie. People on penny stock trading forums lie. CEOs will lie to you on the phone. People in your trading group will lie to you. These lies will come as excuses, like the promotion got delayed because the stock promoters didn’t get their shares. Don’t believe in delays, instead sell and wait to you have a reason to buy again. If someone screws you once, shame on them. If they screw you twice shame on you. Take responsibility for your actions and remember most of the time the people you are getting information from don’t have the whole story. In fact, the people they are getting information from are probably lying to them or don’t exactly know all of the details. Unless you are sitting on the conference call during the stock promotion meetings, then take caution.

Sometimes you will get to a penny stock before there is ever a penny stock alert. You’ll be holding your position waiting for the promotion, but the share price begins to erode. You need to find out who is selling, sometimes it’s the company selling to load up the promoters cheap. In this case, average down. Sometimes no promo is coming and it is time to exit your position. One thing promoters like to do is shake the stock right before the run and then you’ll see weak hands selling. This is the best time to load up because a volume surge usually follows in the next two or three trading days.

Have an exit strategy! Set a target price for yourself. Penny stock trading is like playing hot potato, always be looking to sell and take your profit. Too many people hold and go long. They just end up joining the penny stock trading newsletter lemmings holding the bag. I prefer to add at support and sell right before resistance. If people think a stock is going to .10 sell at .097. Make sure to stagger your sells, so that you don’t buy up a big wall on the ask and discourage buyers.

Take Calculated Risks but Don’t Bet the Farm. I once traded with a guy who is now broke. He was never good at penny stock trading, but he took out loans to start trading. Never invest with money that you can’t afford to lose. Never risk the mortgage payment. Look at all of your trades as risk versus reward. What is your maximum realistic gain and does this justify the trade? Remember there are always people working for you and against you. There are also some really bad penny stock traders out there that just flat out don’t know how to trade. For example, one friend wanted to sell $200,000 worth of shares and placed a market sell order. He ended up getting $50,000 and killed the run for the rest of us because he didn’t know how to liquidate his position in stages. My friends really need to read Penny Stock Trading for Dummies.

If you aren’t using level 2 quotes you are going to get burned. You need to understand the intricacies and learn how different market makers react. You’ll start to ask yourself, what is the spread, is the bid or ask stacked in my favor, what is the next highest big and ask. In my experience reading level 2 is the most important short term indicator you can use in penny stock trading, followed closely by your ability to read stock charts. I watch newbies struggle with L2, but once you understand what is happening and you are able to predict the next move, you can save yourself from huge loses and increase your chances for massive gains. Learning level 2 is a lot like playing chess, except the market makers are the pieces and you don’t know how many people you are playing against.

Bid and Ask. No matter what people say, it is OK to buy on the bid and sell on the bid. Although I always prefer to buying on the bid and selling on the ask there are times when you will see many angry people on the forums telling you not to do this. Sure, hitting the ask can help move up a stock, but this only helps when it is time for the stock to run. So why pay 10% more when you can get shares on the bid? This is penny stock trading at it’s finest. Obviously you never want to bid whack, but there are times when you need to get out and there isn’t enough buying pressure to sell on the ask. In this case you need to bid whack by placing your shares for sale slightly lower than the bid.

Have the best penny stock brokers. I recommend having at least two accounts, one primary and one back up. Some of the best penny stock brokers are Ameritrade, Etrade, Scottrade, Zecco or a broker that supports DAS. Having an unreliable broker can cost you thousands of dollars, especially if orders fail to execute.

Don’t Believe the Hype. Don’t Believe the Story. Buy the story that others are going to believe and sell the news that everyone expects. This will go a long way if you simply trade penny stocks and don’t get too emotionally attached to them. If you put lipstick on a pig, it is still a pig. Same with penny stock trading companies. I’ve come to realize that fundamentals don’t mean anything. It’s only words like buyout, 200% profit increases, reverse merger, multi million deal and forward stock split that make penny stock trading fun.