How to Pick Penny Stocks for Profit

Trading penny stock shares can be an enormously profitable skill if you learn it correctly. They have the ability to make large moves and in the process make you large profits. However, those same large moves can cost you sizable amounts of money if you are not disciplined in your approach to trading. We are going to talk about how to pick penny stocks here in this hub, however, it is not necessarily the most important skill to master. The most important ingredient to your success will be whether you can stick to your penny stock trading system. Discipline is the key to the game.

Where should you start when trying to pick winning stocks? I think there are a few rules that you should follow religiously. Let's talk about them.

Avoid the penny stock newsletters and the penny stock message boards. These offer very little in the way of help for you. Often the message boards are nothing more than a place for pumpers and dumpers to ridicule each other and exchange insults. Very rarely you will run across an individual who knows quite a bit about a particular company but this happens so infrequently that it is better if you stayed away. I have found that continued reading of the message boards clouds your trading decisions. This is not beneficial to you if you let this happen.

I do not find much more use for the newsletters either. I know people are searching for the next penny stock tip and the inside scoop on the next great penny stocks but this is often what gets them in trouble. You need to stop chasing the one stock that will turn your $2000 into $1,000,000. It is not going to happen. What you need to worried with is following a disciplined trading strategy and stock picking strategy. Newsletters often are paid to pump certain stocks to their readership so you need to be careful with who you listen to. Other newsletters have taken stakes in the stock that they are going to recommend prior to their recommendation and get out when their readers cause a jump in the stock. This leaves everyone else holding the bag as the stock slides back to its previous levels.

I believe it is best for you to make your own trading decisions. This way you are not dependent on any individual for your success other than yourself. Stay away from your neighbor's penny stock recommendations and learn how to pick penny stocks yourself.

I would also recommend that you buy penny stocks and not sell them short. Although there are people who make lots of money by shorting these stocks I believe the danger is too great. If the news goes in the favor of the stock, it can make a great run against you. The upside is unlimited. The downside is known. The worst it can do is go to zero and in most cases that is unlikely. So buying penny stock shares is in my estimation a much safer route.

You need to limit your options down to a certain numbers of stocks. It is too hard to track large number of stocks. I would recommend making a penny stock list of about 20 stocks and following only them. This will allow you to get to know the stock and how it trades. This can only help your effectiveness.

Here are a few other criteria to consider when trading penny stock. Look to trade penny stocks with good volume. I would look for stocks that trade in the neighborhood of 1000000 shares each day. If I was to sacrifice on that number I definitely would not take it below 500000 shares. Low volume stocks can get you into trouble when investing in penny stocks. The spread is wider and you might move the stock to much when trying to enter or exit a trade. This can harm your profits.

I would also not trade penny stock shares near earnings release for the company nor any other big pending news. This can backfire on you in a big way if you are on the wrong side. You want to put yourself in the most favorable position to help ensure your success.

It is also safer if you pick stocks that trade north of $1. Personally, I never trade any stock that trades below 50 cents and rarely trade any below a dollar. I feel more comfortable with a higher share price and the possibility for large percentage moves is still the same. So I don't feel like I sacrifice any potential gains.

The last part of learning how to pick penny stocks is to stick to your entry strategy. There is no one specific entry strategy that is necessarily better than another. Whatever strategy you choose just stick to it. If you want some ideas on penny stock entry strategies you can read about it at the hub that the link points to.