Ever since I basically predicted the 20%+ stock market crash of August 2011 a few days ahead of time in this ridiculously perfectly timed Marketwatch article, I get asked back often.
Here’s some snippets from my latest Marketwatch article with some hugely important penny stock basic lessons that’s worth a read in its entirety:
1. Ignore penny-stock success stories
Timothy Sykes, a penny-stock expert who trades both long and short, says you must not believe the penny-stock stories that are touted in emails and on social media websites.
“You have to say no,” Sykes said. “You can’t invest in penny stocks as if they were lotto tickets, but unfortunately that’s what most people do, and they lose again and again. Think of penny stocks as inmates in a prison that you can’t trust.”
Instead, Sykes says, focus on the profitable penny stocks with solid earnings growth and which are making 52-week highs.
2. Disregard tips and read the disclaimers
Penny stocks are sold more than bought — mostly via tips that come your way in emails and newsletters.
“The free penny-stock newsletters are not giving you tips out of the goodness of their heart,” Sykes said. “If you read the disclaimers at the bottom of the newsletters, they are getting paid to pitch a stock because their investors want exposure for the company. There is nothing wrong with wanting exposure, but almost all penny newsletters make false promises about their crappy companies.”
Sykes says there is a difference between stocks making a 52-week high based on an earnings breakout and stocks making a 52-week high because three newsletters picked it. Reading the disclaimers at the bottom of the email or newsletter, which the SEC requires them to do, will usually reveal a conflict of interest.
“Most newsletters don’t tell you the truth,” Sykes said. “They are being compensated to pump up the stock, and they rarely tell you when to sell. Often it’s far too late.”
7. Use mental stops
Because the bid-ask spreads on many penny stocks can be high, as much as 10%, hard stop-losses can actually cause you to lose money.
Although it takes more concentration, use mental stops. “I focus more on risk-reward than stops,” Sykes said. “If I want to make a dollar a share on a three-dollar stock, I will cut my losses at 20 cents so I have a 5:1 risk reward. I aim for 3:1 or 4:1, but not 1:1 or 2:1. If I think a dollar stock has only 50-cents upside (2:1), my mental stop loss will be at 10 cents because the risk-reward is better.”
8. Buy the best of the bunch
Sykes looks to buy penny stocks that have had an earnings breakout.
“I love buying penny stocks when they have good earnings, or when they are breaking out to 52-week highs on volume that is at least a quarter million shares a day,” he said. “They are easy to find if you look.”
The challenge is to find stocks that make 52-week highs that aren’t due to a pump-and-dump scheme. Examples of penny stocks that have fit Syke’s criteria in the past include Tangoe (TNGO), Magal Security Systems (MAGS), and Staar Surgical Co. (STAA).
Definitely read the whole Marketwatch article on penny stock trading
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