How to Day Trade Penny Stocks for a Living

While the theories enabling the stock market to function have significantly evolved over the past century, there are a few fundamental principles that have continued to survive. In theory, investors who are willing to assume a greater degree of risk ought to—on balance—be compensated with significantly greater returns on their investment. Though there are certainly many exceptions to this general rule, there is nowhere that it can be more plainly seen than the penny stock market.

A “penny stock” is a somewhat informal term for a stock that is trading for less than $5 and is currently not listed on any major stock exchanges. Penny stocks undoubtedly present a very high degree of risk, which is why they are typically avoided by most major hedge fund managers. But if you are a risk-tolerant trader willing to open and close your positions on a daily basis, then the penny stock market may be exactly what you’re looking for. There is nothing that can possibly guarantee strong returns to anyone operating in the penny stock space. There are, however, many things that can be done to make the penny stock market notably more manageable.

Despite the industry’s apparent risks, penny stock day trading has enabled many individuals to earn a lucrative living. In this article, we will discuss a few of the ways you can successfully enter into the world of penny stock trading and exploit this unique “high risk, high reward” opportunity.

1. Understand the Risk of Penny Stock Trading

Before assuming you’ve got the penny stock market all figured out, it is important to recognize why penny stocks are so cheap to begin with. Most investors believe that these stocks are unlikely to increase in value. Additionally, they recognize that even if there is a small chance they’ll increase in value, they might not be fairly compensated for the level of risk they are initially assuming.
The risks of investing in penny stocks include:

• The underlying companies are likely to become bankrupt or financially insolvent
• Penny stocks are incredibly like to be manipulated (via “dump and pump” schemes)
• Complications are created by trading off of the major exchanges
• Penny stocks consistently yield lower average returns than the S&P 500 and other major indexes

Penny stocks are ideal for risk tolerant, active traders. If—even after carefully considering all of these risks—you still believe that penny stocks are worth the risk, it will be important to develop some risk-prevention strategies.

2. If it Sounds too Good to Be True, it Probably Is

Penny stock traders are often told that these stocks are a “sure thing” and that they are making a “risk free” investment. However, in the volatile and high-risk world of penny stock trading, any of these promises ought to be interpreted as a red flag.
The penny stock market has relatively few regulating forces, making it especially prone to schemes and frauds. In fact, many once valuable penny stocks—such as My Vintage Baby in 2007—have incredibly low values because a pump and dump scheme has already taken place. If you are going to invest in penny stocks, each stock should have a tangible indicator suggesting that it is likely to increase in value. Every pitch or sale within the market ought to be viewed with a strong degree of skepticism.

3. Act Before the Rest of the Market

In the wise words of author James Pattersenn Jr., “There’s never a perfect time to invest in stocks or the stock market, but there is a right time and a wrong time!” If you are a trader who needs to be absolutely sure of an investment’s profit potential, then the penny stock market will not be for you. Because the window of opportunity will almost always be quite small, swing trading strategies are not recommended.
To successfully trade penny stocks, you will need to act before the rest of the market. Considering those you are “competing” against for the best penny stock opportunities are already risk tolerant, you will need to act quickly. Lowering you trigger points and issuing tight stop losses will help you trade with more precision.

4. Use a Wide Array of Technical Indicators

Technical indicators are useful when trading penny stocks because—contrary to certain price action trading strategies—these indicators may reveal a trend before it has actually occurred. These indicators can help provide you with the information you need to justify entering into a high-risk position.

• Volume Trading: daily trading volumes will be especially relevant in the penny stock market, due to the fact that trends formulate and unfold quickly. Trading volume can also help you identify potential pump and dump schemes.
• Bollinger Bands: these useful “bands” make it easy to identify a security’s momentum and the relative straight of the trend. When applying Bollinger Bands to penny stocks, consider tightening the range.
• Moving averages: there are many different varieties of moving averages; in general, these are designed to help identify when a trend is reversing, strengthening, or remaining the same.

It will also be important to regularly follow penny stock news stories. Because these stories are read by many relevant market makers, they tend to temporarily inflate a stock’s value—even in the event that these stories are eventually proven untrue.

5. Invest Daily and Hold a Diversified Portfolio

Every single penny stock that is currently being traded will have a significant degree of risk associated with it. In order to reduce the risk of any given asset, it will be crucial to diversify and hold many different positions at once. If 90% of your penny stock trades are losers (which is commonly the case), you can still make up for it if the remaining 10% are incredibly successful.
The penny stock trading cycle is usually most bullish in the morning, meaning that you will want to open several different positions as soon as the trading day has begun. But you will also want to assure that—even if you are holding a losing position—each position is closed at the end of the day. Holding penny stocks overnight exposes you to a degree of (uncompensated) risk that could have easily been avoided.

6. Begin by “Paper Trading”

At the end of the day, the most successful penny stock traders are the individuals who are able to effectively read the market and identify which stocks are underpriced and which stocks are fundamentally worthless. This is a skill that takes a significant amount of time to develop—in order to familiarize yourself with penny stocks and not lose any money, it will beneficial to begin “paper trading.”
Paper trading involves making hypothetical trades without risking any actual capital. Experimenting with various indicators, limit orders, trading strategies, and trading software can help you find a strategy that specifically works for you.
Conclusion

The SEC has consistently warned traders about the risks of penny stock trading and using pink sheets in general. However, as has been seen countless times—stocks such as BJRI, MNST, PLUG, etc.—there are indeed a few penny stocks with the potential to explode in value. If you are willing to tolerate risk, develop an active day-trading strategy, and commit yourself to monitoring the market, penny stock trading may transform your daily ROI.