If you have checked out the charts of Penny stocks, you might have noticed random price fluctuations. However, what you may not know is that these price fluctuations lead to the formation of certain patterns in the chart, called stock patterns.
What are Stock Patterns?
On a very basic level, stock patterns are a way of observing a series of price actions that occur during a stock trading period. These patterns can be formed during any time frame – in months, weeks, days, or even within a day.
Interestingly, these stock patterns tend to repeat themselves over and over. Once these patterns reappear, they tend to produce the same outcomes.
The basic concept behind stock patterns is the same for all – be it for regular stocks, penny stocks, Forex, or even commodities. This means that a stock pattern that appears in a currency pair would have the same outcome as the one which appears in a popular stock.
Why Stock Patterns?
In technical analysis, stock patterns is a quite powerful tool. This is because stock patterns help you to look at the big picture and identify the signs of future price movements.
Stock patterns essentially give you a framework for analyzing the battle raging between bulls and bears. These stock patterns can help you determine who is winning – the bulls or the bears. You can then take positions accordingly to maximize your chances of profits.
This means that if you learn to distinguish patterns early on in trading, you will be able to gain a clear advantage over other traders and learn to make profits from upcoming breakouts or reversals.
The Two Types of Stock Patterns
The stock patterns are generally divided into two types. They are reversal stock patterns and continuation stock patterns.
Reversal Pattern: A reversal pattern basically signals that the recent trend will reverse as soon as the stock pattern is completed. This means that if a bearish reversal stock pattern appears during an uptrend, the prevailing bullish trend may reverse to a bearish bias. Similarly, in case a bullish reversal stock pattern appears during a downtrend, the prevailing bearish trend may reverse to a bullish bias.
Continuation Pattern: Upon completion of a continuation pattern, the prevailing trend would continue. This means that if a continuation pattern is completed during an uptrend, the prevailing uptrend would continue. Similarly, if a continuation pattern is completed during a downtrend, the prevailing downtrend would continue.
You can use stock pattern analysis for making both short-term as well as long-term forecasts. Some patterns like inverted head and shoulders pattern could take months to become complete, while some others like bearish engulfing could happen within a day.
Stock patterns are a key part of technical analysis. However, most of the successful traders combine these stock patterns with technical indicators as well as other tools of technical analysis in order to maximize their potential for profit.
If you want to learn more about these topics, the Professional Penny Stock Course provides an in-depth look into all the important aspects of technical analysis, chart patterns, and technical indicators, with clear illustrations of concepts and practical examples of trading.
You might have read about people becoming millionaires via penny stocks. Yes, it is a perfectly plausible scenario. However, contrary to popular belief, luck has very little to do with it!
In order to gain massive profits from penny stocks, it is vital to put in the necessary work. The more you research about the stock before you zero in on it, the higher would be your chances of picking a winner.
So, what are the things you must research about the penny stock before you decide to buy or sell it? Here’s the checklist as per expert traders.
#1 Fundamental Analysis: Analyzing the fundamentals of a company is important, especially if you plan to hold on to the stock for a while. There are a lot of aspects of the company that is covered in the fundamental analysis.
Reading an annual report is pivotal for understanding the value of the company. With the right guidance, you can learn how to the numbers and ratios show you what is really going on within the company. The balance sheet and income statements give a clear insight into the company.
The important pieces of fundamental analysis are described in the professional penny stock course.
#2 Know what the company does: Before you buy a stake in the company by purchasing its stocks, it is important to understand the business of the company. Warren Buffett is famous for his quote – “I don’t invest in what I don’t understand.” Even after researching about the company’s business, if it doesn’t make sense, it may be best to avoid that stock.
#3 Competitors: Every company has a competitor. Just like there’s Pepsi for Coke, the company you are interested in may have competitors in its industry. It is important to research where the company stands amongst its competitors and how much market share the company has when compared to the rivals. Remember that every low-cost competitor puts pressure on the company’s margin. So assessing the company’s standing among its peers is a good yardstick to measure the company’s future prospects.
#4 Check for Red Flags: Read through forums and company reports to understand if there are any red flags with respect to the integrity of the company. Check if there is a clear roadmap about the company’s expansion plans. Look for lawsuits and pending cases in the court. Check if the company has a website that is up to date with details about the company history. Verify if the names of the senior managers, their backgrounds, and how long they have been with the company have been listed out.
#5 Advanced Chart & Technical Analysis: Learn Advanced Chart and Technical Analysis for choosing the stocks that are ready for an upcoming upmove or downmove. The professional penny stock trader course covers all the important concepts of technical analysis and chart reading that can help you pick potential penny stock winners.
In addition to all these, it is important to choose the right platform and broker for trading. It is also best to do paper trading for a while and gain necessary experience before venturing into actual trading with real money.
Here’s a fact. Penny stock trading is a high-risk high-reward venture. You would need clear trading strategies and strict stop-loss set in place if you want to make consistent profits.
However, there is a learning curve involved before you can become a successful trader. So, how can you learn about practical aspects of penny stock trading without losing your hard earned money during the process?
The answer is – paper trading. If you are a newbie to penny stock trading, or you are someone who has had a string of losses in trading, paper trading can be immensely helpful for you.
What is Paper Trading?
Paper trading, also called “virtual stock trading”, is basically a simulated trading process. In paper trading, investors will be able to ‘practice’ investing without using real money.
Paper trading can save you from some painful educational moments of the stock trading. You can also use it for working out the kinks and flaws in any new trading strategy that you are working on.
Benefits of Paper Trading
There are many benefits to paper trading.
Word Of Caution About Paper Trading
Paper trading has a plethora of advantages. However, there are also certain disadvantages.
Many investors are drawn penny stocks as their prices fluctuate wildly within a very short period of time. This gives ample trading opportunities and higher profit potential.
One of the ways to make money from penny stocks is through short selling. However, be warned that there are clear dangers involved with the short selling of penny stocks.
#1 Short selling gives limited profit, unlimited losses: In case you take a long position in a penny stock, the profit potential is unlimited while the loss potential is limited. But on the other hand, the profit potential for short selling is limited while its loss potential is unlimited.
This is best explained with an example.
Assume that you bought 1000 shares of a penny stock for $0.90 each. This means that you have gone long for this trade. Then, the maximum potential for loss for this trade (if stock price reaches zero) would be 1000 X $0.90 = $900. On the other hand, the stock can yield unlimited profits if it surges ahead, as any increase above $0.90 is a profit.
On the other hand, assume that you had gone short for the same penny stock. This means that you sold 1000 shares of the stock for $0.90 each. In this case, your maximum profit would be when the stock reaches zero. This is equal to a maximum value of 1000 X $0.90 = $900. As you can see, the profit is limited, since the stock cannot fall below $0.00! But losses, on the other hand, can be quite staggering. If the stock surges to say, $5, the losses would be equal to ($0.90 – $5.00) X 1000 = $4,100! In short, the loss potential increases with the increase in the stock price. So, short selling can cause potentially unlimited losses.
#2 Brokers intervene: Typically, brokers who deal with penny stocks do not allow short selling of penny stocks. The rare ones who allow it has clear rules regarding the short selling of penny stocks. Many times, the short positions are taken by you in anticipation of a price drop may be covered by brokerages to limit their risk exposure. This, in turn, may cost you a lot of money.
Tips –Which Penny Stocks Are Ideal For Short Selling
Now that you are aware of the risks of short selling penny stocks, here are some tips for choosing an ideal candidate for short selling.
Choose companies for short selling when
On the flip side, be very cautious when short selling during a bull market. It is always best to wait for the trend change before short selling the penny stock.
The knowledge of short selling can be quite useful, as you can use it for either hedging your portfolio, or for profiting from a falling market. However, remember to have clear money management rules in place before you decide to short sell any penny stock. All successful short sellers have a specific amount of money that they are willing to risk while entering the shorts and they diligently follow it.
Choosing the right penny stock broker is quite crucial for making better profits. This is best explained using an example.
Assume that Broker #1 charges a flat-rate of $7 per trade. This means that if you buy $5,000 worth of stock ‘PQR’ at a price of $.10 per share, totaling 50,000 shares (5,000 / .10), the total cost to buy the shares is then $7.
On the other hand, assume that Broker #2 charges $.004 per share with a maximum cost of 0.5% of the trade value. In this case, if you buy $5,000 worth of stock ‘PQR’ at a price of $.10 per share, totaling 50,000 shares (5,000 / .10), the total cost to buy the shares is then $25.
Basically, for Broker #2, the charges would be $200 using per-share method [$0.004 X 50,000 shares = $200] or $25 cap [capped at 0.5% of trade value of $5000].
As you can see, the max costs limits are still quite expensive when compared to simply paying one flat-rate fee.
Penny stocks generally have a not-so-stellar reputation. Many brokers charge additional fees for allowing you to trade penny stocks. It is best to skip such brokers if you want to make enough profits from your trades. Following are some ways in which brokers charge extra fees for penny stocks.
#1 Surcharges: Some brokers add a surcharge when trading penny stocks. They generally have the rule that surcharge would be added when trading a stock below a certain threshold of dollar value. For some brokers, it would be below $5, while others may charge it for stocks below $3 or $1.
The best penny stock brokers do not generally add surcharges.
#2 Restrictions in Volume: Some brokers charge additional fees when large orders are placed for penny stocks. Some others have a limit on the number of shares that can be bought or sold and charge commissions for orders that do not fulfill these criteria.
The best penny stock brokers do not generally have such volume restrictions.
#3 Restrictions in Trading: Many brokers have limitations on the method of placing orders and the type of trades that can be executed.
Good penny stock brokers allow you to place your order via their online platform or through phone orders. There would also be no limitation on the type of trade you can execute.
Best Penny Stock Brokers
Based on the various factors like trading platform, reasonable commission, account minimums necessary etc, the following are best Penny Stock Brokers in no specific order
TradeStation has commissions of $5.00 per trade and needs an account minimum of $500.
Fidelity has commissions of $4.95 per trade and needs an account minimum of $2,500.
TD Ameritrade has commissions of $6.95 per trade and needs an account minimum of $0.
Charles Schwab has commissions of $4.95 per trade and needs an account minimum of $1000.
Interactive Brokers has commissions of $0.005 per share and needs an account minimum of $10000.
One of the most important trading tools of successful traders is a trading journal. So, what is a trading journal and why do you need one? Here is a quick overview.
Many traders typically forget about their trades soon after they close it. They simply move on to the next trade and completely avoid learning from what went right or wrong.
A trading journal is the best solution for this scenario. It includes things like
Keeping a trading journal gives you many advantages
Even though keeping a journal appears to be a time-consuming and boring task, you can learn you best trading lessons from it. By simply reviewing the trades and analyzing where things went right or wrong, you would be able to learn quite a deal more than just attending seminars or reading a book.
By maintaining a trading journal, you will be able to analyze your performance and behavior from your trading data. Then you go about making changes to improve your trading results and get a higher win rate.
In general, investors prefer to buy stocks so that they can sell these stocks at a higher price at a later date. This is basically a buy-and-hold strategy.
Now, the concept of short selling is quite different. Here, the profits are made from an anticipated fall in the price of the stock in the future.
An investor who wants to do short selling would first borrow shares of the Company (say, PQR) from a broker. Then, he would sell these shares of PQR at the market price.
This is done with the hope that he would be able to buy back these sold shares at a lower price in the future. This way, the investor hopes to “cover” the position and give back the shares to the broker.
When buying back the shares, the investor makes profits from the difference between the (high) price when the shares were originally sold and the (low) price of the buyback.
So, unlike the typical “buy low-sell high” concept, the investor seeks to “sell high-buy low” in case of short selling.
Assume that a short selling of a stock was done by an investor. Now, if the stock price does not decline as the investor anticipates, a short squeeze happens. Here’s how!
Meanwhile, the investors who have remained long on these shares usually gain a massive profit from such ‘Short Squeeze’.
Following are some of the ways to identify short squeeze.
Once a potential short squeeze stock is found, there are two ways of trading it and making profits from it
Remember to keep the stop-loss orders relatively tight in order to control risk.
The latest frenzy is all about marijuana and pot. With growing investor interest happening in the cannabis and hemp industry, penny stocks in the sector has been booming. The anticipation of full legalization in Canada and several U.S. states as well as the shifting consumer opinion have caused these pot stocks to surge ahead.
According to cannabis research firm ArcView, between 2016 and 2021 in North America, pot sales is expected to have a compound annual growth rate of 26%. This translates to almost $22 billion in sales, enough to have a big chunk of profit for growers, distributors, and retailers. This has obviously caused investors to be excited.
But be warned that the ‘Green rush’ also have a lot of hidden risks. Here are a few
#1 Scams: Many shell companies have come in to capitalize on the marijuana mania. Some companies just change their name and prefix ‘bio’ to it, to be counted among the marijuana stocks. Investing in such companies without proper research can cause you to lose a lot of your capital.
#2 Changing Politics: Even though the public opinion has been generally in favor of pot and marijuana, many lawmakers are still on the fence regarding its legalization. The political opinions may keep changing based on what party is in power.
Despite the legalization of cannabis in 29 U.S states, it is still classified by the federal government as a schedule I drugs. The schedule I drugs are defined as “wholly illegal, prone to abuse, and have no recognized medical benefits.”
In the 29 states that are currently “legal”, there are new federal policies getting approved that give state-level attorneys general the choice to whether or not bring marijuana charges against businesses and people.
All these are quite risky for the industry as a whole.
#3 Too much supply: Since the legalization, the market is now flooded with new pot and marijuana companies. Millions of square feet of greenhouse facilities are now constructed or in development. Once all this comes into the market, it can lead to an oversupply. This, in turn, can lead to lower wholesale prices and margins, impacting the profits and stock prices.
#4 Management Risk: Due to the recent legalization of the industry, many of the pot and marijuana stocks are managed by relatively inexperienced people. Hence, it is possible that the management team of pot stocks would be potentially prone to mistakes. This is something investors need to be aware of.
#5 High Volatility: Marijuana stocks are generally expected to have volatile swings, especially in an emerging market. The high visibility of marijuana stocks in the media can also contribute to wild moves. Investors should make sure to have a proper stop loss in place so that it is not hit during the wild swings.
#6 Dilution of Shareholders: Shareholder dilution is another risk of marijuana stocks. Cannabis-based stocks usually have issues finding financial services, as federal law permits fining of financial institutions that aid marijuana companies. The tax rates are also as high as 70% to 90% for weed businesses. So, bought-deal offerings or secondary offerings are used to raise capital by these companies. This leads to rising of share counts, diluting investors in the process.
One of the major reasons for the immense popularity of penny stocks is its price. Specifically, the low stock prices of penny stocks. This low price makes Penny Stocks accessible to almost all investors and basically, drive the penny stocks.
When Penny Stock prices start to increase, more investors are tempted to invest in the stock. This heightened demand further drives up the stock prices. This, in turn, causes an increase in the overall popularity of the penny stock and the circle continues.
But what exactly triggers the initial surge in the penny stock price? Here are the factors.
However, be warned that the prices of Penny stocks are easy to manipulate when compared to larger stocks. This is because of
#1 Low prices: If a penny stock is priced at $0.01 per share and its price increases to even $0.02 cents, the promoters and insiders would have already doubled their money.
#2 Thin trading: Many penny stocks are thinly traded. So any big purchases can cause the stock prices to inflate. Many insiders buy penny stocks and inflate its price, leading to other investors clamoring in for buying. Soon, the insiders dump the stock and walk away richer.
#3 Legitimate appearance: Many newbies to trading do not realize that, just because a company is listed on a stock market, it would be a legitimate and high-quality company. The truth is that there are many companies that near bankruptcy which is listed on the stock market.
#4 Anonymity of Owners: There are no stringent regulations when listing penny stocks. So, it is possible for owners to stay anonymous, make money through an artificially-created price surge and quickly exit the stocks.
#5 Easy access for Scammers: Many scammers can easily create false promotions and advertisement of companies without the knowledge of the owners.
#6 False promotions about incredulous potentials: Promoters do not focus on the almost-bankrupt status or lack of revenue of the company. Instead, they focus on ridiculous prospects of its product that can potentially change the world – be it an engine that runs on air, or the cure for an incurable disease. Many novice investors may believe these promotions and think the shares as a great investment.
Tips to recognize and avoid pump and dump schemes
After the infamous Ponzi scheme, the next big scam that is happening is called the pump and dump scheme. The Internet is ripe with novice investors who could be easily influenced into investing their money into such pump and dump schemes.
So, what exactly is a pump and dump scheme? Do the perpetrators get caught and punished? Is there any way to avoid pump and dump schemes? How exactly can you recognize such schemes? To know the answers to these, simply read on.
What is pump and dump scheme?
Pump and Dump, also known as ‘Ramping’ is an internet scam. Here is how it works – the investors of a particular stock aggressively promote the stock through various means. It could be done through press releases with glowing reports about the financial health of the stock, or by providing ‘insider information’ about a new product or innovation in the company which could potentially catapult the price of the stock within a few days.
Suddenly, there would be mentions about this new ‘hot’ stock in newsletters, bulletin boards, social networks, chat rooms, or even from analysts on TV or Radio. Unsuspecting investors get caught in the bait and quickly invest money into the stock. This further drives up the price of the stock.
As soon as the peak price is reached, the original fraudsters or pumpers (who had invested at a very low price) exit their entire stock. Then all the hyping of stock ceases, causing the price of the stock to tumble down. Eventually, investors lose their hard earned money that was invested.
Unfortunately, there are no real regulatory authorities to control such Pump and Dump schemes. Hence, it is always best to recognize and avoid such schemes than getting caught in them and try to get compensation for the money lost.
How to Recognize a Pump and Dump?
Below are some red flags that indicate that the stock is showing signs of pumping activities:
Another simple but effective way to check out if the company is genuine is by doing a google search of its office address. Then switch to the street view and see what pops up. Abandoned plots, P.O boxes, trees, and vacant buildings are all just scams, plain and simple!