OTCPicks Penny Stock Blog

Penny stock investing is by far one of the most popular forms of trading. Don't believe me? Google penny stocks and blue chip investing and see which has the largest number of search results. With that popularity comes high risk and reward. Like everything in life you do not want to just dive into unknown. Here at OTCPicks.com we strive to have the best members around and that means one thing: education. Here are a few tips we have come up with along our long investing career that can turn you into a pro:

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1 - MANAGE YOUR RISK

Recent events have shown that effective risk management is a trick that not even the largest institutional traders have mastered. The irrational fear of having a losing trade is a phobia that afflicts many penny stock traders. Realistic traders understand that not every trade will be a winner. The key trick is to recognize your losers quickly and cut those stocks loose. Seasoned penny stock traders employ stop-loss systems to minimize their overall risk.

2 - WATCH THE MARKET MAKER

Penny stock traders notoriously spin conspiracy theories relating to the activities of market makers. Many of these theories border on the insane, however, there is a kernel of truth to this line of thinking. Smart penny stock traders watch the price action for telltale signs that the market maker is poised to take the stock one way or the other. The ability to decipher these situations is a trick that can potentially yield obscene profits.

3 - DON'T BE LONG ONLY

The vast majority of penny stock players are long only traders. This means that they only buy penny stocks, and they never short them. Some mistakenly think shorting stocks is unpatriotic, or even evil. There are situations that dictate going long a stock, and there are situations that portend a stock's decline. Only playing one side of the equation greatly limits your opportunities. Taking advantage of short opportunities is an important trick for a good penny stock trader to have within their routine.

4 - LISTEN TO THE CONFERENCE CALLS

The vast majority of losing penny stock traders do not follow the news and filings of the stocks they trade. Decent penny stock traders read the transcripts of company conference calls. Superior traders use the trick of finding the archived conference call and actually listening to it as opposed to relying upon the transcript. Hearing the CEO’s and other top executives’ voices often yields valuable insights. Actually listening to conference calls is time consuming, but this trick often can serve to either prevent a loss or maximize a gain.

5 - BE A CONTRARIAN

Many penny stock traders go with the flow and follow the herd into crowded trades. Seeing that the majority of penny stock traders are losers, logic dictates that one would want to go against the crowd. Learning to be contrarian is a penny stock trick that puts you in the minority -- which most often represents the smart side of the trade. Learn to identify the signals of a crowded trade. These become evident when all of the so called pundits are touting a given stock and everyone thinks it is a "no-lose proposition.” Once you have identified this situation, go against the crowd.

6 - USE THE RIGHT BROKER

When trading penny stocks, a good trick is to learn how not to be tricked by your broker. Fees and commissions charged by brokers can be complex and confusing. Some brokers charge an outrageous per-share trading fee, which translates to huge commissions for penny stock traders. Many pay these commissions unaware that less expensive alternatives exist. Check out this penny stock broker list at OTCPicks.com.

7 - BE BEARISH UPON REVERSE SPLITS

Many stocks in the penny stock world attempt the neat trick of a reverse split. A reverse split is the same type event as a regular stock split, however, with a reverse split the amount of your shares decreases. Companies often use a reverse split as a last ditch effort to prop up share price or to reduce a bloated share count. Although the concept of "always" does not exist in the trading world, one can come quite close to saying that stocks "always" decline immediately subsequent to a reverse split. If you own a stock that announces a reverse split, you should sell it quickly. If possible, try to short stocks right after a reverse split occurs.

8 - NEVER AVERAGE DOWN

Penny stock traders notoriously attempt to reduce their basis in a given position by averaging down. Avoiding this temptation is a required trick for penny stock trading success. Smart traders jettison losing positions quickly. Continuing to hold, and adding to, a losing penny stock position is a surefire recipe for failure. Smart traders bail on their losses and let their winners run.

9 - DON'T BE A PIG

While it is smart to let your winners run, it is piggish not to take chips off the table during a positive run. The most frustrating occurrence is what traders call a "round trip" trade. This is when you watch one of your penny stocks rocket upward without selling only to see it fall back down to where it came from -- yielding you zero profits. Sell into runs up and pick a reasonable target where you will exit your position enjoying the fruits of the trade as opposed to watching them disappear.

10 - DON'T BELIEVE THE HYPE

The management of a penny stock company is prone to put out enough press releases to wallpaper a house. Some smart traders have hypothesized that there is an inverse relationship between stock performance and the average number of press releases put out weekly by a company. The trick is not to be swept up by the hype and dive into a stock because the CEO says in a press release that he believes good things might happen in the future.

Those are just a few of the tricks or strategies employed by the top penny stock traders. Be sure to follow Penny Trader and OTCPicks.com as we continue to uncover the latest techniques and strategies to ensure your trading success.