Trading the Pennies

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Part 1

This article is divided into the following sections:

1. Investment Goals – The Penny Market, Caveat Emptor

2. The Nature of The Penny Stock Market

3. Advice Re The Penny Stock Market

4. Newbies In the Penny Market

5. Opinions (And Warnings) Re the Penny Stock Market

6. How To Find Penny Stocks To Trade

7. My Trading Technique In The Pennies

8. Perfecting Your Trading Techniques And Observations

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Section 1 – Investment Goals – The Penny Market - Caveat Emptor

An investor should first determine what his investment goals are. If he is trying to build wealth for the future, for retirement for example, then definitely the penny market is not for that individual.

Blue chips and mutual funds are better, where an investor plunks down a specified amount of cash every month or every quarter and lets the cash value of his investments grow (hopefully) over time. Even blue chips are no guarantee however but they are a lot safer than penny stocks.

For a young guy that has twenty or thirty years to go before retirement and is investing for post-employment years, I’d recommend a combination of blue chips, mutual funds and real estate.

Nothing is absolute but folks will always need a place to live. The old adage “there is only so much land” and the ever increasing population are fact. Assuming we don’t have a national catastrophe where the population of the country is reduced by 10-20% or more, real estate will continue to be a good investment over the long run.

There are many kinds of real estate investments. If you decide to get into it, you have to decide what area is best for you. I have a friend I’ve known for almost forty years now. Back when we were both still in our 20~s, he started buying houses and renting them out. He ended up with about twenty houses. He’s retired and a millionaire now.

I have another friend who started about twenty years ago buying apartment complexes. He now has 165 units in several buildings that he rents, and nets after costs and taxes, about $400,000 a year. He’s doing so well that he quit his day job to manage the apartment complexes. He has a whole lot more spare time now too, and he’s only in his late 40~s.

I’m just using these examples as things you can do with real estate. There are a lot more also.

So if your investment goal is to build assets for the future, I strongly recommend you consider all the above and forget about the penny markets.

Let me repeat that. IF YOUR PLAN IS TO BUILD WEALTH FOR THE FUTURE, FORGET THE PENNIES.

However, if you want to speculate, have some fun and possess some cash you can risk, read on.

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2. The Nature of The Penny Stock Market

First let me tell you that neither I nor anyone else that doesn’t have inside information is an expert in the markets. Some folks are better in the markets than others of course.

Almost everybody on the boards refers to themselves and other folks as investors but in reality, anybody playing the penny markets is speculating at best, outright gambling most of the time and frequently simply rolling the dice on a one-shot grab at the gold ring.

It’s a little better with stocks on the OTCBB than the pinks, but both are very risky, because OTCBB stocks and even less so the pinks, aren’t required to file much information.

It is accurate to say there’s no chance of getting rich off blue chips, not on one roll of the dice. The stocks are too pricey and seldom move much. Penny stocks have therefore always been a haven for folks wanting to hit it rich on a small investment and con men, taking advantage of people’s greed.

It’s true that for a comparatively small amount of cash, you can conceivably hit the big time and make several million dollars off a penny stock. There is that chance but it’s so infinitesimal, it’s about the same as hitting a lottery.

Little investors like us in the penny market are minnows swimming with sharks. The game is rigged against us, in favor of the big boys. The stock market, not just the pennies, has always benefited the privileged. I don’t expect that to change since the big boys own all the brokerage firms and are members on the SEC board of directors and have the connections with high-powered federal employees and elected officials.

There are always con men and hustlers in the penny markets. Many are running companies. An investor buying into a con or scam has almost no chance of making any money if he’s holding for long-term appreciation. In fact the odds are extremely high he will lose a large part or all of his investment.

Very few penny companies ever become successful and make any money, even the legitimate ones. It’s a tough world out there with stiff competition. Holding long-term on straight companies then is also almost always a losing proposition.

You have no friends in the penny markets. The companies were started by individuals to make money for themselves, not those folks buying the company’s stock. When it comes down to a company owner making a decision to put cash either in his pocket or his stockholders’ pockets, you can guess which way he will decide. Don’t ever expect a company to sacrifice its own best interests in favor of its stockholders. It doesn’t happen.

Company owners, officials, PR and IR guys, other organizations such as PR firms and consultant agencies working for the company, investment newsletters and people on the penny chat sites, including some of those running chat sites will lie to you, again and again if you buy their hype.

Company PR~s are often full of hype and grandiose language, predicting magnificent developments, just around the corner for the firm. I call it weasel talk from Scott Adam’s book Dilbert and the Way of the Weasel and the book by Paul Wasserman and Don Hausrath, Weasel Words: The Dictionary of American Doublespeak.

Weasel talk allows companies and their cohorts to distort the truth in an effort to pump the stock’s PPS. The language is sufficiently vague that the company can’t be legally held to what they appear to say. Remember too that every PR has the safe haven statement at the bottom, plainly stating that everything above it may not happen. It’s a caveat emptor warning.

Some penny companies, often times more than you would suspect, are nothing more than pump and dump schemes. The problem with pump and dump schemes is that often no one can tell for sure until the scam has run its course. It’s too late then for investors holding the stock when it collapses.

The typical tactic of pump and dumps is to hype the stock for as long as they can. Then when the grandiose PR~s, ads and appearances by the CEO~s fail to further generate any interest, the PPS is allowed to drop very low. The company then pulls a reverse split, always with a symbol change and sometimes with a change in company name and business plan. Then the pump and dump starts again.

There are people on the penny chat sites that have their own axes to grind. There are groups of people too, working in concert to hype stocks. I suspect but I can’t prove of course that a lot of these people are paid hypers.

Penny stocks can and are manipulated by the MM~s, and other people of influence, with the big bucks and power to do so. MM~s have some leeway and have all the information in front of them about what a stock is doing, which way it’s moving, the number of buy and sell orders at what prices, etc. They got it all, so they can within limits manipulate a penny stock’s PPS. If you had all the information they have in front of you, making money in the pennies would be easy.

Ironically, if you play the penny market smart, you’ll probably never get rich, since when you got a nice profit, you’ll sell. Big rewards require big risks, as they say, like holding onto a penny stock for long term, hoping the company is honest, competent and competitive. Few penny companies however will ever deliver the pot of gold at the end of the rainbow.

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3. Advice Re The Penny Stock Market

First, never play the penny markets with money you can’t afford to lose, funds you’re saving for your kid’s college fund, or cash needed for the house payment next month for example. Be prepared to lose every cent you put into the penny market.

You’d be surprised how many people risk money they can’t afford to lose, figuring they can beat the market in a few weeks or months and put the money back they took out of the college fund, etc.

Second, if you work every day and have the kind of job where you don’t have time to devote to your stock market speculations, you should proceed extremely carefully and consider developing a method that limits your risks. Setting limits sales when you can’t watch your stocks all the time is a technique you should consider. Limit sales will protect you from catastrophic losses. There’s nothing worse to return home from work in the afternoon and discover your stock CRAP dropped 70% while you were at work, and you’re down $2500, for example.

Third, if you’re not having a good time playing the pennies, don’t get a kick or adrenaline rush from it, or if it seems more like a headache than anything else, get out.

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4. Newbies In the Penny Market

It is a fact that newbies, people first entering the penny market, do not know what they are doing. Not only are they inexperienced but often time worse, they are incredibly naive and trusting, and don’t believe or understand there are people in the markets that will take all his money, his house, car and everything else if they can.

There are four tough lessons for a newbie in the markets to learn. They are:

(1) Do not take anything you hear or read at face value
(2) Cut your losses, no matter how painful it may be
(3) Never fall in love with a stock
(4) Always make your own buy and sell decisions.

Lessons 2 and 3 above are inter-related and require the individual to toss emotion out the window and face reality. Learning these lessons however often saves a lot of despair and gut-wrenching soul-searching in the long run.

Folks fail to follow lessons 2 and 3 above because facing reality is often unpleasant, especially after you have just bought a stock and watch it drop precipitously in a day or so, finding you’re down a grand or two before you can snap your fingers. People rationalize, hope, pray, and pump each other up on the chat sites in an effort to make the PPS increase by the sheer force of their desire to see it go up.

The phrase, Falling in love with a stock actually refers to someone who is blind to what is going on with the stock, much like someone who has just fallen in love. He or she is purposely oblivious to the other person’s faults and bad habits. Eventually reality must be faced in the stock market, just as in any love relationship.

CMKX was a prime example of people refusing to face reality. There were thousands of people, still are too, that continue to claim today the company is coming back, that the stockholders will eventually make money. It was so flagrant with CMKX that those folks that went completely off the deep end were labeled CMKX cultists. If you criticized them on one of their chat sites, they’d gang up on you like buzzards on road kill, even kicking people off the site if they were too vocal in their criticism of the company and its stock.

Lesson 4 above re make your own buy and sell decisions refers to people – you see them on the penny chat sites – that lack confidence in their own decision-making abilities. They ask other folks what they should do. Relying on other people’s opinions to make buy and sell decisions in the penny market is one of the fastest ways possible to go broke. You seldom know whom you’re talking to, his experience level, whether he’s lying or is a total fruitcake; or if he has his own axe to grind. It could well be some precocious twelve year-old jerking folks around for grins and giggles.

As far as controlling your emotions, each individual has to learn how for himself. I don’t know of any step-by-step method to teach you. You simply have to make a concentrated effort, initially anyway, to avoid the mistakes I listed above. Selling a stock you have lost money on, especially one involving a considerable amount is painful. The first time just do it. Once you have done so a few times, it becomes less painful. I won’t say it becomes painless but you can learn to live with it without ruining your entire year. If you can’t learn to let go of stocks that you know in your mind and gut that are lost causes, the penny stock market is not for you.

Cutting your losses, willingly selling a stock at a loss can be agonizing. Most newbies and a lot of experienced players too find it very difficult. They’ll hold to the bloody end, when the company goes under or pulls a reverse split.

To cut my losses, I set my loss limit at 33% of my purchase price. I follow the rule religiously except for one exception which I’ll get to later. So once I buy a stock, if the PPS drops by 1/3, say from .0100 to .0066, I sell it, regardless of rumors, expected news or what folks say on the chat sites – remember you are talking to a lot of people on the chat sites that have never learned the lessons above, and probably never will. Those folks soon run out of cash and are quickly gone from the penny markets.

You can decide what you feel is an acceptable level of loss. I’m retired. My finances are in order. I don’t need the money I have in the market for anything else, so my loss level might be quite high for some folks. You might decide, based on how much money you have to play with and your pain threshold how much loss on a stock you can live with, to cut your losses at 10 or 20% for example.

The one exception to setting a loss level is if you find a stock that you just wanna throw some money at in a wild chance you will hit the big time. As long as you understand the odds are heavily against you, you’re not gonna get crazy over the stock and you can afford to lose every cent you put into it, that’s OK; as long as you don’t do it every week.

I’ve done this with QBID. I thought last year it had a great chance to go all the way. Looking at the stock and company now, I guessed wrong on it. However, even if I lose all my cash in it, it won’t hurt me. I’ll go on living the same life style and playing the markets. It’s the only one in ten years in the markets that I’ve done that with however. I was really counting on floating around on that 90-foot yacht though.

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5. Opinions (And Warnings) Re the Penny Stock Market

These are my opinions. There are people who will argue strenuously on some of these points.

Some guys claim to be fundamentalists, basing their trading decisions on company fundamentals, the financial data of companies. I think that’s mostly hogwash since so few pinks and companies on the OTCBB ever make a single dime. With the pinks, we don’t even know most of time what the balance sheet looks like, so when someone tells me he’s a fundamentalist playing OTCBB stocks and pinks, I know the guy is pulling my leg.

Some people heavily rely on TA, technical analysis, or what is commonly referred to as charts, to make their trade decisions. Most folks won’t outright claim that the charts predict what a stock will do in the future but they strongly imply so with their positive attitudes about what their charts say – a lot of weasel talk here too.

Common sense tells us there’s nothing that will predict the future. If charts were accurate, we’d all be using them, making money right and left and already be on the beach, having previously made our millions in the stock market.

I have a friend who was a CEO of a smaller company for twenty years. He has told me that the big boys, the MM~s and those on Wall Street with enough capital and in a position to influence the PPS of penny stocks, know a lot of people use charts. The big boys, he claims, will use the charts against the little investor. They know what the charts predict and will force the stock’s PPS to move – manipulate it, in exactly the opposite direction.

Penny stocks move mostly on rumors and news, or rumors of news. They move too of course on financial information when it’s available. Charts are designed to reflect movement of a PPS based on normal economic indicators. However, one PR with either good or bad news can send a penny stock’s PPS quickly in one direction or the other. Charts can not and do not take into account news and rumors.

I have a basic knowledge of charts but I do not use them to help me make buy and sell decisions. Charts are helpful however in that you have to spend a lot of time on them, so you become more familiar with the stock, more intimate. You get a “feel” so to speak for what the stock will do. It’s hard to explain but once you spend a lot of time studying and following a stock, you develop some intuition about what it will do, a sixth sense so to speak. This was especially true for me with PLNI. It got to the point I could accurately guess (for a while) which way it would move 60-70% of the time and that’s more than sufficient to make money off a stock.

Beware of companies continually issuing grandiose PR~s but never living up to their promises; the same for companies that promise such and such by a certain deadline and never meet them.

Beware of people on the chat sites that are always totally positive on their favorite stock and criticize anyone that has anything negative to say about it. Often they are hyping the stock. You won’t get an honest opinion from them. These same people will frequently post unrealistic predictions for their stock without any supporting evidence whatsoever, and if you quiz them on it, you won’t get any response.

Beware of folks on the chat sites that write too slick, use the lingo and buzzwords, claim to have many years of experience in the markets and have made hundreds of thousands of dollars in the pennies. These people are almost always hypers. They will write a couple of paragraphs that sound extremely impressive. Readers will come away with the impression that, This guy knows what he’s talking about, but in reality, a closer examination of his missive reveals he didn’t say a cotton-picking thing.

Beware of companies that claim their stock is down because it’s been naked-shorted. Often times the company will claim it’s gonna sue the world and correct the ugly practice of naked-shorting. Naked-shorting does happen, but in most cases, it’s the company simply providing excuses, covering up other flaws.

Whatever you read from companies and individuals on the chat sites, apply your own logic and common sense and see if it makes sense to you. If it doesn’t, then what you’re reading is probably bogus.

Last year, CMKX claimed to have a gold mine in South America. They issued a PR claiming they were recovering ore from the mine and shipping it by boat to the U.S. for refining. Shipping cost for anything is expensive these days, and the company was shipping tons of dirt to the U.S.? That seemed totally illogical to me because it would have been far too expensive to ship dirt to the U.S. I was crucified on a couple of sites for suggesting it was bogus. As it turned out, I was correct. The company never shipped an ounce of ore or dirt to the U.S.; none they ever mentioned anyway.

Anything that doesn’t sound right, or sounds illogical, or promises a company has failed to keep, is A Red Flag. When you have three or four or more red flags with one company, watch out! You can perhaps swing trade or flip it, but you’re almost guaranteed to lose your cash if you sit in that stock too long.

If you read or encounter anything about a penny stock that sounds too good to be true, it almost always is. The Green Baron in all its resplendent hyperbole called CMKX, The Stock Play of a Lifetime. Many folks swallowed that bait whole. The Green Baron has taken a lot of flack over that one too. Its reputation was severely tarnished, to the point I think they still haven’t fully recovered.

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6. How To Find Penny Stocks To Trade

I follow the stock advisory boards and see what stocks they are recommending. Because so many people are blind sheep, they will jump on a stock merely because somebody that pretends to be knowledgeable recommends it. Lots of folks will buy the stock, forcing the PPS to increase. Often times you can jump in early, ride the stock up a ways and jump off, taking your profit. The Green Baron was great for stimulating PLNI this way several times last year.

I subscribe to stock advisory newsletters, to help find stocks that might be moving. The stock advisory newsletters are everywhere. You can do an internet search on the phrase penny stock newsletter, and similar terms. You should find a lot of them to subscribe to. These are good because often times these newsletters go out to hundreds of thousands of people, maybe millions, and as I mentioned above, lots of folks blindly buy a stock based solely on someone’s else’s advice. I use the same technique to trade these stocks as described above with stock advisory boards.

A recent example of the effect of a stock advisory newsletter is DIAAF last Friday, the 28th of April. Several hours before the opening bell, Pennybuster.com emailed an alert message on DIAAF to all its subscribers. When the market opened, DIAAF gapped up from 0050 to .0052 and then ran to .0074 I believe it was. Once the run was over, it fell back and closed at .0055.

Obviously I can’t prove the advisory message from Pennybuster.com made the stock run, but I checked and I couldn’t find any other news that day that would have caused DIAAF to run the way it did. Perhaps Pennybuster did not influence DIAAF last Friday, but I think it did.

I follow several chat sites to see which stocks everybody’s talking about. Those are the stocks that are usually hot, and most frequently active. Check the sites for the most active threads. There’s where you find most of the users, talking about their favorite stocks at the time.

Lastly, there are various stock selection programs that you can use to select stocks. You can set dozens of parameters to assist you in finding stocks that are active or hot. Most of these programs you’ll have to pay for. Check them out to see if they’re worth a try. The two that come to mind right away are Microcap and Stockfetcher. There is a thread here on HSM for Microcap Trade. I’m not sure about Stockfetcher but the URL is: www. Stockfetcher.com.

[Guapo]

7. My Trading Technique In The Pennies

It’s simple really. I find stocks that are moving up and down. I watch them for a while to see if they repeat the pattern. I check to see that the company hasn’t filed for bankruptcy, doesn’t have a reverse split scheduled or a history of reverse splits. If the stock is moving in a range and does so in what appears to be a more or less regular frequency, say once or twice a week for example, I’ll jump in. That is, once you discern its movement pattern, you can try to trade it.

A stock’s movement in a (somewhat) regular pattern is referring to as channeling.

GTE, (GTEL before on the OTCBB) has been great for me. It continued to channel regularly the past two years, though last Friday it took a serious blow to the solar plexus. A PR came out announcing a class action lawsuit against GlobeTel for fraud, re their alleged deal with a Russian Company.

PLNI was great last year (2005), from about April when I found that stock, to about September or so. I traded that one a dozen times, making money on all but one trade.

IDVL was good too for a while during the summer 2005, regularly moving up and down from .0007-.0008 to .0014-.0015. ICMH and PHBT were also good for a while.

When I say moving up and down regularly, I don’t mean every day but frequently. You may have to sit in a stock a week or so before it will move again. I try not to stay in them long however. I like to get in and out as quickly as I can. I’ll flip a stock the same day if possible.

If I am in a stock that’s moving like IDVL was this past summer, and it moves up to .0012 or .0013, I’ll sell it. If it hasn’t moved over .0015 for example in three or four months, it’s probably not gonna do so at the time I’m sitting in it. Remember, I have seen it move before to .0014-.0015 and fall back, so when I got my profit, I take it.

Don’t ever fret about lost profits. If you got a profit on a stock, take it. So what if the stock continues to climb after you sold? If you hold every stock that’s climbing, you’ll lose money on most of them, because most of them won’t go as high as you think or hope they will. Take your profit and don’t look back.

What do you do if you are holding a stock and it does really take off? No one really knows when it will stop of course. If a stock is running hard and consistently, that is moving up regularly without any long periods of time where the PPS remains the same, I’ll start looking to sell when I have a 50% profit.

A long period of time is two-three minutes for me, for a stock that has been running hard, where the PPS is increasing; say a tick a half-minute or minute. Of course the stock could be just hitting a plateau and will continue to move up after a few minutes. That does happen. My experience though is most of the time when the rate of increase of the PPS slows and finally stops for 2-3 minutes, it will stop running and often turn around and go the other way. When the PPS plateaus for 2-3 minutes, I’ll sell.

I partially missed out on a great run by MBAH in 2003. It ran from about .0040 all the way up to .08, or something like that. It hit several plateaus on the way up. I sold at the first one. There was no indication it would run that hard or that high. I made money but not nearly as much as I could have if I’d waited.

Those are the breaks of the game. MBAH never ran again. Not many others made a similar run that year either. I took my profit and was satisfied with it. Once it hit .0080, it turned around and in a few weeks fell all the back down to about .0020 or in that area. Then the company pulled a reverse split. Folks that bought in on the run up to .0080 and held because they thought it was going higher got screwed.

GZFX is another example. It ran in 2004 I think it was, from something low, .0040 or so I think, to .18 in about 2-3 weeks. Yes, that’s not a typo, .18.

Nobody dreamed it would do that. Some folks sold and took a nice profit. My younger son made a killing of it. A lot of people though, not willing to sell, thinking it was going to half a dollar, held on and rode it all or most of the way back down, continually repeating, This is the day it’ll turn around and skyrocket again.

GZFX actually had two runs to about .18. After hitting it the first time, it dropped down below .10 but a week or so after, it turned around and ran to .18 again. Incredibly, a lot of people had two shots to unload their shares but did not do so, believing all the hype saying it would go to a dollar in another month.

The lesson to be learned with GZFX is that no matter how high a stock increases, there will be people on the boards claiming it will go higher. However, once a penny stock like MBAH or GZFX skyrockets, it seldom repeats, and if it does, it’s usually months and sometimes a year or more.

With both GZFX and MBAH, you have to look at what’s reasonable. It is very easy to become hypnotized by a hard runner. When GZFX hit .18, there looked like there would be no end. Heaven was within sight! The stock had been climbing for two or three weeks. Everyone expected it to continue to do so.

In the first place however, that kind of a run was unreasonable. It would have been realistic and practical to sell at 100% or 200% profit. In this case though, you wouldn’t have realized as much profit if you had sold early. It was simply luck for those people that held on until .18. GZFX is a prime example of the statement I made in Section 2 that if you play the pennies wisely, you’ll never get rich.

[Guapo]

7. My Trading Technique In The Pennies (Continued)

INSQ has been hot lately with some people claiming it’ll hit .05. If it actually does, then there will be guys predicting ten cents within days. And if by some chance it reaches that level, there’ll be people then claiming in 3 months it will be a dollar. And lordy, lordy, you could knock me over with a feather if INSQ hits a dollar a share, but there will then be people urging you to hold because in another 3 months it will be $5 a share.

I like to play pennies in the lower ranges, because you can really make a killing if you’re holding one that really runs hard. If you buy a penny at .0001 for example, say 9 million shares, that’s $900 dollars cost to you, ignoring the commission. If it runs to .0013 and you sell it at .0011, that’s a profit of $9000.

Sub-pennies will occasionally do that, especially ones that are hot. In fact this is exactly what I did with CMKX. I sold shares I had purchased at .0001 at .0011 in May 2004.

Let me stress here again how important it is to take your profit. Failure to do so will result in a lot of lost dollars in profit most of the time. Generally it is entirely unreasonable to assume a penny stock like GZFX will run from .0040 to .18, or MBAH from .0040 to .08.

Re CMKX, there were tons of people in the same boat with me, some holding more than 20 million shares that did not sell at all. CMKX sunk back to .0001 and went out of business last year. Thousands of people lost some really BIG bucks on that one because they were holding long.

2004 was also the year that some people lost over $100,000 on WNMI – they admitted so on some of the chat sites - simply because they thought it was going higher and refused to sell when they had quick windfall profits. A loss of $100,000 on a penny stock is truly a bitter pill to swallow! WNMI by the way has been sitting at .0003 - .0012 with one run to about .0018 since 2004.

Now, up to the middle of 2005, the trading techniques I described above worked well for me. I often held on longer than I do now because many stocks were running hard, fifty percent gains were not unusual, and there would be a lot of them running every day. I was playing them longer because they were running better then.

Then it seemed things changed. Stocks would move up 10-20%, even spurt or jump suddenly. It looked like the stocks would increase some more, so folks would jump in. They might move up a little, but then they would flatten out and start to drop. It was almost like the MM~s were throwing out the bait, wiggling the stock, so to speak, to get everybody to bite. When they did, the stock did nothing and started to fall.

Last fall was so bad, so few stocks were moving and not moving much at all that I was forced to revise my technique. Instead of taking more risks, holding a little longer, I revised my goals downward and started taking smaller profits, even down to ten percent if I could sell my stock on that narrow a price spread.

Money is made most frequently in penny stocks from the movement in a short span of time, hours, days or weeks. You can’t make money in them when they aren’t moving; and that’s what we have been facing since about last September, though it’s picked up I think this quarter, 2nd quarter, 2006.

[Guapo]

8. Perfecting Your Trading Techniques And Observations

Whatever method you use to help make buy and sell decisions, you will call some wrong. There is no perfect method for playing stocks.

It may happen – let’s hope not – the first time you sell using your new method, you may be wrong; the stock will take off a minute after you sell and triple in price. You will feel like kicking yourself then.

It may not happen the first time but eventually it will. It’s something you have to accept, simply because no matter what you do, you’re not gonna call all of them correctly.

I focus my trading technique on when to sell. If you use some method to determine when to hold or hold longer, you’ll miss a lot of those too. The problem with a technique to help you decide to hold or hold longer, is that you increase your downside risk. If you call one wrong and you hold it long, and the stock starts plummeting, you stand to lose a lot of the profit you would have gotten by selling. In some cases, it may result in your losing some of your actual cash, when the stock falls so hard you can’t sell it at almost any price.

If you use a technique to help you determine when to sell, you stand less downside risk. By selling into a run as the PPS is climbing, you’re guaranteed a profit. If the stock continues to climb after you’ve sold, you’ve really lost nothing.

What you can do to help you develop your trading method is to paper trade. You can test your method and theories without using real money. Don’t bite my head off here folks, read on!

For example, pick out half a dozen stocks, or even more if you can find them. The more stocks you paper trade, the more data you gather and more quickly you can see the results of the way you’re trading.

Pick out stocks you think are going up – might take a little research but it’s well worth the effort – write down buy X number of shares at Y price and the date.

Follow all of them – make a separate watch list for all of them and set alerts for all of them. When they start running, sell when your method tells you it’s time to sell. Record the results, Y price sold at and the date.

Then continue to watch them and see how many continue to go up and how many stop running after you sold and start to go down.

This way you can gain some confidence that your method works OK, and you can adjust your sell parameters if need be. For example, let’s say you’re shooting for a 50% profit but you find the majority of the ones you’re picking stop running at 30%. That means you are aiming too high. You can adjust your method to go for a 30% profit and sell when the stocks hit that range.

[Guapo]

8. Perfecting Your Trading Techniques And Observations (Continued)

Of course, every stock is different. So if you evaluate a stock and really think it will run to 70%, you can play it that way, holding longer than you would for another stock that you think will only run to 30% for example.

You’ve been trading already so you probably know that paper trades don’t always work the way real trades do. For example on paper, you’re holding 200,000 shares of stock you bought at .0070. Let’s say your commission cost is $10 per trade. That’s a cost of $1410. The stock then moves up to .0075 and sits there for five minutes and doesn’t look like it’s gonna move anymore, so you decide to sell it at .0075. On paper your proceeds from the sale is $1500 minus the commission of $10 or $1490. So your paper profit is $80.

The problem with real trading, especially in the pennies, is that you may not be able to sell it at .0075. You may not be able to sell it unless you drop your order to .0073 or .0072 for example. At .0072, you don’t make a cent.

In reality, it is difficult in the pennies, trying to make small profits on small moves in the PPS. Small moves indicate only a small demand for the stock, so by the time the stock hits .0075, all those folks that were willing to pay .0075, and there may have been on one or two of them, have already got fills. When you go to sell at .0075, there’s nobody else at that time who will give you that price for your shares.

I would love to be able to make trades like the one above, even if I’m netting $80 profit per trade. If I could, I’d be doing 10, 12, 15 or 20 trades a day. It’s impossible however to find that many stocks with a sufficiently high demand which will allow you to do that.

It’s easy to sell shares when the demand is high and the stock is running. That’s why pumpers do what they do, in order to create demand, so they can dump their shares into the market - you can’t sell shares, or anything else if nobody wants it. Not even the pumpers can do that.

And how many good runners do you see every day? I don’t know about you but I miss most of the first-time runners simply because I don’t about them until it’s too late to get into them. There are thousands of penny stocks by the way. Most of them we never hear about.

So on stocks that move in a narrow range, like in the example above, you not only look for ones that have a high volume but also a large number of trades, relatively speaking.

You want to find those stocks that people are buying and selling, so the number of trades is often more important than the total volume. The reason is because of this:

Say a stock has traded 30 million shares so far but the average trade has been 1 million shares. That’s only 30 trades, or 30 buyers, maximum. Heck, for all we know it might be one guy or two guys making several large buys each. It might actually be only ten guys actively buying the stock, even with a 30 million share volume.

Now for a different stock, let’s say it has traded 30 million shares but the average trade has been 200,000 shares. That’s a total of 150 buyers, max. When you get ready to sell your shares, you got a lot better chance with 150 buyers in the market than 30.

This is a generalization of course but that’s usually how it works. I watched a stock last year, IDVL sitting at .0007. In about 15 minutes it moved up to .0015 on 9 trades. Once it hit .0015, it went dead and folks still holding couldn’t sell it at that price. Nobody else was left that wanted it at .0015. The stock eventually moved back down to .0007.

So for stocks in hot demand and running hard, it’s no problem selling your shares. That’s why you always try to sell into the run before it stops. Once it ceases, buying demand may dwindle next to nothing. We saw that to some extent the other day after the good run by INSQ.

For stocks that trade in narrow ranges where the demand is not so heavy, you look for a lot of activity, the more buyers there are within that range, the better chance you have of selling your shares.

You see folks on the boards always talking about volume and equating it with high activity. As you can see, that’s not always the case. A high volume does not necessarily indicate folks are buying the stock. A large volume could mean a few heavy hitters picking up 5 or 7 million shares at a time for example.

So for pennies, you want to keep an eye on the number of trades too.

Many users on the boards equate a sudden increase in the volume with a price increase. However, often times a sudden large increase in the volume will indicate traders are dumping the stock. Take a look at some charts for pennies. That’s a frequent occurrence, where you will see a large and sudden increase in the volume being traded, with the PPS dropping, not going up.

Most folks are looking at the volume of trading for the day. That, often times, doesn’t tell you much at all. What’s more important is any sudden increase or decrease in the volume. The sudden changes are more important when you’re trying to flip stocks. They indicate a change in the trading pattern of the stock, and are a much stronger indicator of an impending change in the PPS.

[Guapo]

8. Perfecting Your Trading Techniques And Observations (Continued)

For sub-penny stocks trading in the ranges of .0001 to .0050 for example, a ten percent move doesn’t result in much of a dollar increase. For example, a ten percent increase in a stock at .0050 is a move to .0055. If you have 100,000 shares, that’s a gross profit of only $50, and a net profit of only $30 after the two ten-dollar commissions.

What you can do with these stocks – but it’s risky – is to increase the number of shares you are buying and selling. By doubling or quadrupling the number of shares, you are doubling or quadrupling the amount of dollars in potential profit.

However, you’re also increasing the chances that there may not be anyone that wants to buy the larger number of shares you’re now trying to sell. You also stand to lose a lot more, dollar-wise, if the stock suddenly heads south on you.

To continue, in the example above, if you are holding 500,000 shares instead of 100,000 shares and sell at .0055, that’s a profit of $150, assuming of course per the discussion above that you can sell at .0055.

Likewise if you’re holding 100,000 shares of stock you bought at .0050 and it drops to .0045, you’re down $50. If you’re holding 500,000 shares and it drops to .0045, you’re down $150, not counting the commissions.

I wouldn’t worry too much about how you initially develop your trading techniques. Jot down several points or principles you want to follow and begin with small amounts of cash. Your philosophy and method of trading will evolve as you gain experience.

Once you have developed your method of trading, continually review it, because the markets are always changing.

Lastly, if you aren’t making money with your technique, or at least holding your head above water, you’re doing something wrong. Review how you’ve been trading and change it. Failure to do so will only result in continuing to lose money.

I hope this information helps.

GOOD LUCK TO ALL!

[Guapo]

Flipping Pennies Between .0001 - .0002


Recently on HSM I have seen the same question posed several times. The inquiries are something like this, “I found stock ABCD and it always moves back and forth between .0001 and .0002. Can I buy it at .0001 and sell it at .0002?”

The general rule is that most of the time you can’t, though on rare occasions it’s possible.

There’re several reasons why a penny stock trades at .0001-.0002. First, the company usually generates no profit and has a lot of debt. Secondly, the company may have diluted the float into the billions, rendering the stock more plentiful than sand at the beach. Third, it may be a company which has done a reverse split causing the PPS to sink into oblivion. Therefore, it’s inherently risky trying to flip one between .0001 - .0002.

Regarding the actual mechanics of flipping a stock from .0001 - .0002, the bid is .0001 and the ask is .0002. MM~s will buy the stock from you at .0001 or sell it to you at .0002. That’s one way MM~s make money, pocketing the difference between the bid and ask. This difference is called the spread.

The MM~s function is execute your orders but they are also required to make money for their brokerage firms. Who do you think is first in their hearts? MM~s won’t sell the stock to you at .0001 and then help you sell it to someone else at .0002. They will instead sell shares they have and take the profit.

However, there are rare occasions where you can flip the stock. There are times when the MM~s don’t have shares and can’t get any. Let’s say you have an open sell order at .0002. Your order is just sitting and looking at you. Along comes a trader who believes the PPS will increase, or perhaps he’s received a tip the stock will run. He submits a buy order at .0003.

If the MM~s are holding shares, they’ll sell their shares to him at .0003. If the MM~s don’t have any shares or can’t obtain any, they may buy your shares at .0002 and fill the open .0003 order. If you are the only one with a sell order at .0002, your order will be executed. If there are other sell orders open at .0002, and yours is executed, you were just lucky your order was selected.

So once in a blue moon you may succeed buying at .0001 and selling at .0002. I have never known anyone however who’s been able to repeat the process several times or more a day or even in a month. *

What many folks assume but which isn’t always the case, the bid might be less than .0001, even though your software shows it at .0001. This is because most brokerages’ software only displays four decimal places. **

If the true bid is under .0001, .00005 or .00007 for example, it’s a strong indication there’s so much stock available hardly anybody wants it anymore. This is caused by extreme dilution where the market is saturated with the stock, generally from the company having dumped as much stock as they can into the float.

When the actual bid is under .0001, the stock is almost always dead. That is, there is no way it can recover. There won’t be sudden trading with the PPS increasing again. ***

So what happens if you buy a stock with a real bid less than .0001? Your software shows a bid of .0001. You assume that bid is accurate, so you submit a buy order at .0001 and it’s filled. So you hold the stock a while, a few days, a week or perhaps longer. Finally you tire of waiting and decide to get rid of the stock. You submit a sell order at .0001. Again your order just sits there, unexecuted. More time passes and you finally realize you can’t sell at .0001. Why not?

Remember the actual bid is less than .0001. That means the MM~s are already holding shares they bought for less than .0001, or they’re presently buying them from somebody at less than .0001. ****

Since the MM~s are currently buying stock or already have it at less than a purchase price of .0001, they won’t pay you .0001 for yours. If you decide you really want to dump the shares and sell them at market, you’ll get less than .0001 for them. *****


* If by some chance you find one where you can indeed flip repeatedly in a short time frame, don’t forget the Pattern Day Trader Rule.

** If you suspect the bid is less than .0001, you can call your broker to confirm it.

*** The longer you hold a stock like this, the more likely you’ll be caught in a reverse split.

**** It’ll either be the company or another entity holding large blocks of shares.

***** Some brokerages may not allow on-line market orders in penny stocks. In this case, you’ll have to call your broker and request a broker-assisted trade.

[Guapo]

Flipping Pennies Between .0001 - .0002


I would be remiss if I didn’t mention the other possibility. There’s always a chance the PPS will move above .0002. Whether a penny stock at .0001 - .0002 increases in price is a function of two factors, how much demand for the stock can be created and the size of the float. As a general rule of thumb, the larger the float, the more demand required to make the PPS move.

Because each company is different, the following six statements are general guidelines. They aren’t cast in stone.

1. Penny stocks with a float between 1-2 billion shares may still move up and down regularly, perhaps even run short distances. At this point, the market isn’t yet saturated with the stock.

2. With a float of 2-4 billion, the stock may trade higher than .0001 - .0002. It is possible sufficient demand can still be created to move the PPS or maintain it at levels above .0002. As the float approaches 4 billion, the PPS will usually drop to .0001 - .0002.

3. From a float at 4-6 billion shares, it’s still possible, though getting very difficult, to stimulate enough demand to make the stock pop a few points, to .0003 - .0006, for example. If it does occur, after a few trades in this range, the PPS will drop back to .0001 - .0002.

4. At a float of about 6 billion, it becomes extremely difficult to create sufficient demand to make the PPS move above .0002 at all. You might see an occasional order go through at .0003 or even .0004. Usually it’s an isolated instance of someone who believes the stock will move higher.

5. As the float climbs above 6 billion, the PPS will sink and remain at .0001. You’ll rarely see any trades at .0002. Most likely the ask will drop to .0001. If the MM~s are willing to sell you shares at .0001, that means they already hold or are currently buying shares at less than .0001.

6. At 12 billion in the float, the PPS is dead. The only way it will move is if someone submits an insane buy order at .0002 or higher. It is now almost impossible to create enough demand to increase the PPS. Only miracle PR~s will move the PPS, announcements of a cure for cancer or a deluge of gold bricks raining on the company’s property, for example.

Some people will disagree, claiming it is indeed possible the PPS of a company with a float of 6 billion or more may increase. Are they correct? Yes, it’s possible in some cases, where the company will show a profit soon, or has already shown it is making money, for example.

However, new companies are created with small floats. That is, the company didn’t begin as a publicly-traded entity with 2 billion or more shares in the float. If they have sold or used 2 billion shares or more and aren’t profitable yet, it’s highly unlikely they will become so in the future. It’s more likely the company’s real business is selling stock.

Lastly, take a look at the chart for the company. Select as wide a time frame as you can, 1 year, 2 years or 3 years if the company has been in business that long. If the company has never been profitable, if it’s only been selling stock or both, the chart will resemble the sawtooth chart below.

In conclusion, it is possible though often difficult to flip a stock from .0001 to .0002. Before you try to do so, check the float. For pinks that information may not be available. If you suspect it has a large float, check the company’s history and its chart. If the company rarely meets its goals and/or fails to live up to its promises, and the chart looks similar to the one below, you probably won’t be able to flip it.

For stocks where you know the size of the float, trying to flip any of them with a float above 4 billion is extremely risky. Most likely you can’t. For those with a float above 6 billion, I recommend you stay away from them. If you buy shares at .0001, it’s highly probable you will end up selling them back to the MM~s at less than .0001, or as happens so often if you continue holding the stock, get caught in a reverse split.

[Guapo]

How To Find And Evaluate Penny Stocks For Trading
Pages 16-17 Posts 157-167
http://www.hotstockmarket.com/forums...e-26-a-16.html

Finding actual new penny companies is really difficult. Most of them don’t do an IPO but rather use a shell to do reverse mergers. I don’t know of any way to search to find penny stock companies about to go public. It would be nice if that information were available on the internet. It might be but I have no idea where to find it.

One technique is go to the penny stock forum and click on “Views” so that you list the threads in a descending numerical order. Those threads with the highest number of views are the busiest, relative speaking. A thread may be new so its count won’t be very high but its predecessor’s might be.

The theory is the more people that are posting and reading that thread, the more interest there is in the stock. The more interest indicates it may be one of the hotter penny stocks at the moment. It’s not foolproof but it’s a way to search for stocks that are active. The opposite is generally true. Dead threads have few people interested in the stock, therefore the stock is probably dead also.

Another long-term method is to find stocks that have done reverse splits. Follow them after the have done their latest R/S and check their PR~s. Often after a reverse split, the PPS will fall like a rock followed by the price remaining dormant for months (small volume with little movement in the PPS). After some times passes however, the company may re-invent itself and begin to issue new PR~s. The company attracts new investors and pumps the stock, sometimes making it run where you get that large spike as shown in the chart. If you’re holding shares before the run and sell into it, you can make some nice cash. You should also check for companies that have just done or about to do any kind of mergers.

In fact you should use all the above methods and anything else you can find to help you find active stocks. It takes a lot of work to find and track these types of companies as you can see. You can spend a lot of unproductive research time. Relatively speaking, the pennies have been dead the last couple of years. That is, not many of them run like they did several years ago. The fewer of them that run, the harder it is to find them, of course.