When trading OTCBB penny stocks, it’s obvious that what a company claims do, is irrelevant. On the other hand, when it comes to small-cap stocks, or and any other asset type for that matter, the truth is that we have to pay attention to a few more important factors. Although you should still treat any stocks like ticker symbols, rather than companies, it’s important to realize that earnings, FDA announcements, and buyout rumors, can have a major effect on stocks.
You don’t want to get caught with your pants down because you didn’t realize a stock was going to release earnings, so you always should be aware of earnings releases in any stocks you are currently trading or considering. Yahoo has a useful earnings calendar that you can find here. This is also important in the context of the overall market because, in this new market, really important or large companies can have a major impact on the overall market’s direction. Since the market is now controlled by the high-frequency algos, a stock can do basically anything, and therefore holding through earnings is most certainly a gamble. After hours and premarket trading is generally very thinly traded and therefore stocks can move a lot more than you think.
For example, just because a stock has positive earnings does not mean it will go up, and just because a stock misses its numbers, does not mean it will drop. Due to the market framework, market makers will always take the side of a trade which differs from what the majority of market participants are thinking. This is why a lot of times you will see a stock spike big on earnings and then the next day it is all the way back down. Therefore if the majority of people are looking to buy a stock, it’s best to take the opposite stance and wait for a reversal trade.
Another thing to watch out for is if you trade a biotech stock which has a pending FDA approval. The FDA provides a schedule for all companies, and while you may not know about early-stage decisions, you will usually know when a major decision will take place. Therefore, if you are trading biotech stocks, you want to be sure that you are aware of any potential market-moving FDA decisions. Keep in mind, a lot of crazy things can happen in the days or hours leading up to an FDA decision, so it’s best to keep your time frame very short in these situations.
Buyout rumors cannot be predicted, so you don’t have as much control over this factor, but you still want to be aware of them. When a company gets a buyout rumor, a stock will typically spike big. For this reason, it’s best to be careful and take the rumor seriously I don’t suggest buying off a rumor, but at the same time shorting a stock that has just spiked due to a rumor, is very dangerous. It’s best to sit back and wait for a little and see what effect the rumor has on stock. Since the market’s first reaction to a sudden move, is typically the wrong one, you don’t want to get caught trading with the herd.
Although paying attention to these factors does not guarantee you won’t lose, if you keep this stuff in mind, then you should avoid any foolish losses. Since risk management is a major part of successful trading this will be very helpful.
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