How Penny Stocks Work

  • June 25, 2019

Watch our video on how penny stocks work and how to trade them properly.

When you set out to learn trading penny stocks, you need to first understand how they work. They aren't like other stocks.

Every trader wants to learn how to trade penny stocks at some point. It's kinda a rite of passage. Especially for new traders, but even veterans of the stock market will check them out at some point .

We're all looking to grow our accounts and penny stocks are a way to do so if you don't have a lot of money. Watch our overview video on how to get started and be prepared to trade the hot movers.

Make sure to check out our basic day trading course too if you haven't already. Regardless of your opinion of penny stocks, there are pitfalls to penny stock trading.

In order to protect yourself and be successful, you need to know how to spot good and safe penny stocks for trading.

Penny Stocks 101

  • What are penny stocks? Many times we think of them as sub-dollar stocks. While that's true, the SEC defines them as stocks that trade under $5. I look at all stocks under 10 bucks as penny stocks, personally.

The list above is stocks from .01 to 10 bucks.The columns included give you details on some important stats needed to know before you enter a trade.

When it comes to learning how to get started trading penny stocks, we can't express enough how important it is to use proper risk management.

The biggest reason is because of the potential moves in either direction can be YUGE! You need to know how to trade them because no list is going to teach you how to do that.

Which is why we've put a lot of work into teaching you how to trade them properly because we care.

Hottest Penny Stocks This Week

IBO is a monster mover in the last week thanks to news the stock ran quickly after the company announced it joined the manufacturing USA's tissue Biofabrication initiative.

Risk Management is going to be what protects you in a sector rife with pumping and manipulation. Don't be afraid to trade penny stocks, however.

A lot of people will scare you away from them, usually because they tried to trade them and failed, or know someone who failed. Perhaps they never learned the right way to trade them, or found them too stressful. 

Indeed, because of the volatility, they require more attention. This means setting alerts using your broker platform for support and resistance and checking in on them a few times a day, or several times a week.

I set alerts using Trendspider (chart above) because they are dynamic and tell me when a hot penny stock has broken above resistance on a 9EMA hourly, for example. 

With the right training and practice, you can profit off any move, be it news or stock pumpers. Anything is going to be successful when you take the time to properly learn the craft.

The unfortunate reality is that 90% of traders fail and give up. The reason for this is not taking the time to properly learn how to trade different sectors and strategies.

If you want to be an exception to the rule, than don't take shortcuts. Anything worth learning takes time.

Check out our trading service to learn how to use risk management in trading penny stocks.

How to Get Started in Trading Penny Stocks

How Do Penny Stocks Work

  • One thing to be aware of as a newbie penny stock trader is what kinda world popular penny stocks are a part of...that world I'm speaking of is the world of the pump and dump.

As new traders, we want to make millions like we see the guru's talking about on social media. You know, the guys who took 50 bucks and turned it into 6 million in their first year. Ridiculous right?

There are some phrases to be aware of. If someone promises that a stock is "going to the moon", 9 times out of 10, it's not true.

Although that 1 time out of 10 can be profitable, its not worth going all in on. In fact, never go all in on a trade, That's for places like R/wallstreetbets.

Have you ever seen someone pumping a stock that moved a tenth of a penny and they're celebrating about all the money they made? I've seen that and thought to myself, "how in the world did they make that much money on such a tiny move?"

They'd have to have millions of shares.Something just doesn't sound right with that. Being generally skeptical of claims like this is a good thing and perfectly healthy.

Learning the buy and sell signals is essential. Believe me, the gurus are not buying when most of their followers are.They are selling.

Sometimes the reality is that they're bag holding from someone else. They need to get out. So they need you to buy their shares. They might even average down to ride it back up! (learn when to implement a stock loss vs stop limit order).

If someone is promoting getting on the "ground floor of something big", that' a red flag. Everyone wants to be the fist trader/investor of a company like Netflix. But how likely is that? Sure it happens, but lets be realistic. These are peoples lives and futures and we cannot gamble with it.

Did you know that many times the people doing the pumping don't have a stake in the company? They get paid by these companies to go out and get you to buy shares.

Stock promotions are legal, even if they are unethical or immoral. A company can pay a stock promoter and get away with it. Craziness!

There may be many things to be aware of with trading penny stocks when it comes to manipulation so that's why we go into how to spot safe stocks to trade. Take our free day trading course to help you get started. 

1. Why Charts Matter

How many times have you heard "charts don't matter" when trading penny stocks? In fact, it happens more than you think.

If someone is telling you the charts don't matter, run away! And fast! Penny stock charts are just as important as the large cap stock charts.

How can you understand how penny stocks work without the charts?! You'd never know how to spot good entries, and you sure as heck would not know when to get out. 

In fact, we could make an argument that penny stock charts have more importance than large cap ones like Apple or Amazon; especially when it comes to investing.

However, charts give you a lot of information no matter the price of a stock. The mot popular chart style is candlesticks.

Candlesticks are the foundation of trading. They tell a story alone and when grouped together. They also give extremely important support and resistance levels.

Charts will be the deciding factor on whether or not you want to take the trade. Therefore, when someone tells you the charts don't matter, that's a red flag.

Take our online trading courses to learn how to read charts as well as different trading styles. That can help with trading penny stocks.

How to Get Started in Trading Penny Stocks

​You can see here on this penny stock OBLN that it's a doji candle trading in between moving average lines on the daily. So it's indecisive and trapped between moving average lines. As a result, it's not a great buy until it gets above and stays above moving averages. Although you will notice it does pump and dump. 

2. How Penny Stocks Work With Candlestick Patterns

Now that we know how important charts are to trading penny stocks, we can delve into patterns. Patterns are the name of the game for pro traders.

Patterns tell us if a stock is bullish, bearish or reversing. That's so important when getting into a position; no matter what trading style you implement. My three pillars of chart reading are patterns, price action, and volume. 

Penny stocks are on the cheaper side of the market so you can buy more shares of them, and sometimes get a little carried away. Therefore, you need to make sure you take the right position and don't oversize.

Would you go short on a bull flag? Would you go long on a tweezer tops? You have to be able to spot these patterns on a chart. That's how you protect yourself and your brokerage account?!

3. Study and Practice

Again, not every trade is going to be a winning one. In fact, even the best traders fail 30-40% of the time. They cut their losses fast and let their winners run. They add to winning trades and stop out on trades before they run away into the dirt

Patterns form within patterns on multiple time frames. You have to be able to see the small patterns within the big ones to really get your best entry.

These can and do cause patterns to break down all the time. The best way to enter a trade is with multiple bullish signals or multiple bearish signals if you are going to short.

If you want to see penny stocks traded in real time with patterns, then check out our day live trading room. You'll have a live chat with live video streaming where you can ask questions. It's a great tool.

4. Technical Analysis and Trading

​If you look into trading the stock market at all, you come across people with differing views on everything from patterns to technical analysis.

Some people are for it and some are against it. However, here at the Bullish Bears, we've sent countless hours researching and studying an have found just how helpful technical indicators can be.

There's no tried and true method that's going to give you a 100% success rate. If someone is claiming they've found it, they're lying. They probably want you to pay a lot of money for it too.

​Moving averages not only give you potential entries and exits, they also provide support and resistance. If you use the 9 and 20 EMA's then you want to get into a trade a close to the 9 as possible.

Once price breaks below the 9, that's usually a sign to close the trade. You can also use moving averages or VWAP as stop losses.

These indicators are incredibly helpful in trading penny stocks. And you'll need the help; especially staring out.

How Volume Works With Penny Stocks

  1. Volume is so important to learning how to get started trading penny stocks. Have you ever been stuck in a trade with no volume? It's like watching paint dry.
  2. Since the penny stock sector is manipulated, you need volume to get price to move. When price isn't moving, you're stuck in your trade.
  3. That can happen quite often with penny stocks that are pink slip or OTC. Look for stocks with at least 1,000,000 in volume.
  4. Again, we can't stress the importance of volume when trading penny stocks. Don't trade any stock without volume.

1. The Importance of Bid Ask Spreads With Penny Stocks

When it comes to trading penny stocks you need to pay attention to the bid ask spread of the stock. The larger the bid ask, the harder it is to get orders filled. This goes along with any type of stock.

That's especially bad if you're trying to close a trade. You want a tight bid ask of no more than 20 cents apart.

Many times the penny stocks being pumped have a large bid ask. They're being pumped because someone bought without checking out the bid ask.

Then they're trapped because when they go to sell, no one is there for that price. As a result, they have to resort to trying to get other people to buy so they can get out. 

2. Watch Lists for Trading Penny Stocks

If you're going to get into trading penny stocks, you want to find a service with a trustworthy penny stocks list.

A good penny stock watch list is one that has stocks with patterns and technical analysis for good setups. If a service can't tell you why a stock is a potential good play, then stay away.

If they wouldn't trade the stocks they're putting on their watch list why should you? Don't buy a stock just because it's on a watch list either. Do research for yourself.

​Here at the Bullish Bears we have a penny stocks list updated nightly along with trading alerts setups. However, just because an alert fires off doesn't mean to take the trade.

Make sure the setup is there. Sometimes the alerts fire off and then head in the other direction. If you jumped into the trade because the alert went off, you'll take a loss.

If you prefer stock alerts page with more expensive stocks, we've got you covered there too.

3. How to Get Good at Penny Stock Trading

If you're going to learn how to get started trading penny stocks, then you need to practice! Open a ThinkorSwim account and practice trading them. 

In fact, take our watch list and practice trading that. As a result, you'll learn to trade patterns and find good entries and exits.

Our penny stock list has good, safe plays that we trade ourselves without the pump and dump. You won't be growing our brokerage accounts for us. 

The Bottom Line

Trading penny stocks a great way to grow a small account. Be aware of the pump and dump and look for stocks with volume and a tight bid ask spread. Trade using proper risk management and you'll have a great trading experience.

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