If you have been interested in getting started with penny stocks, you may have noticed that there are more than 8,000 penny stocks. Most people feel completely lost by such an overwhelming amount of potential stocks to choose from. At the same time, they are very scared about losing my money, so this feeling has prevented a lot of people from getting involved in penny stocks. Fortunately, there are various ways to overcome this dilemma when you know how to analyze penny stocks correctly.
The Truth About Penny Stocks:
Most new traders don’t know the correct way regarding how-to research penny stocks. They try to use paid alert services, message boards, and social media sites like Reddit and Twitter to follow other people’s recommendations. For this reason, they never learn how to trade penny stocks and many of them lose money. Usually, they have to stop trading before they learn how to analyze penny stocks correctly and because of this, they miss out on so many opportunities.
On the other hand, there are also many people that jump in head first with the idea that penny stocks are a quick way to get rich. Having a gambler mentality is extremely dangerous and it almost NEVER ends well. You really need to take your time and learn to trade correctly before you put your money at risk. For this reason, it’s important to build a strong foundation before you get started.
How-to Overcome the Fear
It’s quite simple in theory, but slightly more complex in practice. First, you will need learn which types of penny stocks to actually focus on and the then you can determine when it might make sense to actually buy or sell them. Contrary to what most people think, you can’t go and buy a penny stock just because they have an interesting product or service. There is a lot more going on behind the scenes in penny stocks, so it’s important to know about how to analyze penny stocks. Once you know what to look for, you will build up some confidence and that will reduce the fear.
Trading Plan:
What you need to do is make a trading plan and learn how to follow your plan. It’s imperative to make sure that your trading plan include strategies which have a very good risk to reward and a statistical edge. If you don’t know what this means you should not be trading until you do. The truth is, 95% of traders are clueless and these people will fuel your profits. They’re gamblers, they’re emotional and just downright uninformed about penny stocks.
How-to Analyze Penny Stocks:
Before you ever consider to trade a stock it’s very important to analyze the following factors below. You should never buy a stock if you have not looked over each and every one of these or the risk will rise dramatically. This is where the fear of losing comes from because the penny stock market is setup in a way to steal from those that don’t take the time to educate themselves. Penny stocks are inherently risky. It’s a fact, however there are ways to minimize these risks, and turn the volatility into an advantage if you trade them correctly.
Top Percent Gainers:
If it is not at the top of the list for % gainers on the day, it should not be on your watch list. It’s very simple. You can’t profit when a stock has no volatility and isn’t moving. This will filter out all the junk and keep you focused on stocks that can actually get to your target. Before you can get started in penny stocks, you should have a stock scanner.
Trading Volume:
The volume of a stock on the day is an extremely important factor to take into consideration. Stocks with no volume will not move and if they do move, it won’t be for very long. In general when the price of a penny stock spikes up and there is no volume, it is a random event and will get pump and dumped quickly. Do yourself a favor and learn all you can about volume analysis, if you want to understand how to analyze penny stocks.
The sector and industry group:
Certain sectors or industries of the penny stock market often heat up. This can cause many stocks to rise even when only one of the stocks has a catalyst. This is because people have FOMO and decided to bid up a similar stock in the same industry. What you need to understand is that penny stocks are just ticker symbols. If you treat them like this and don’t get attached, there is a lot of money to be made.
The Float:
The float has to do with a stocks share structure. In general penny stocks have a low float, however this is not always the case, especially in terms of the worse offenders that have been pumping up their shares and then doing stock offerings for many years. This dilution can increase the float, which can make the stock move more slowly. This means a stock with a low float, but high trading volume is potentially dangerous. Generally a stock with a float less than 5 million shares is considered low float.
The Long-Term Chart:
In order know how to analyze penny stocks you need to look at their long term charts. The longer term chart for most penny stocks is very ugly. It’s rare you see an up trending chart. Most have downtrend charts where the stock gets destroyed each time it spikes. Even when a penny stock company seems to be doing well they usually will have a down trending chart. Always remember short sellers will look to short into any spikes in to resistance so if you catch a penny stock, it’s smart to sell into strength just before long term resistance.
Intraday Chart:
The last thing to look at is the stock’s intraday chart. It’s best to start with a longer time frame like the 4 hour chart and work you way down. Although the 1 and 5 minute can be good for entries, you general don’t want to base your decision on them, since there is too much market noise. You should look at the highs and the lows of the current day, the prior week, months and years. You need to determine intraday support and resistance levels as well which is a very important part of how-to analyze stocks.
Catalyst:
A catalyst such as a news event is what leads to increases in volume. This brings lots of interest into a stock and is usually what triggers breakouts. What you have to be careful about is whether the catalyst is real or just fluff to spike a stock. 99.9% of penny stocks are not good companies. When they have a catalyst such as a news event, a lot of these are not even real. Use these events to your advantage, but don’t believe the hype or the lies that you see in the news.
Financials:
Most penny stocks have terrible financials. If you know how-to analyze penny stocks, you can see why they are priced so low. When companies earn profits, they won’t stay as penny stocks for very long. Unfortunately this doesn’t happen very often in the penny stock market. It’s good to look at whether a company has earnings, revenues and how much cash they have on hand.
SEC Filings:
The SEC filings have so much information it can be a bit overwhelming, but that doesn’t have to be the case. They basically tell a trader everything they need to know to make a decision to buy or sell a stock. Unfortunately, most people never bother to read them or they skim over them. This is a poor decision. You should definitely take the time to learn how to do your due diligence on penny stocks.
Grading a Stock:
After you look at these variables you can then decide if a stock is more bullish or bearish. If eight to ten factors are bullish, then you have an easy way to determine if you have a potential edge if you were to buy it. On the other hand, if eight to ten factors are bearish, there is a high probability that it could be a good short. If you can’t short, then that means you shouldn’t even consider trading it.
If six or seven of the factors are bullish or bearish, you can still make a decision as to whether to go long or short a penny stock, but you need to be careful not to take to large of a position when the setup isn’t ideal. On the other hand, if it’s five or less, you don’t have an edge, so it’s best to pass on these trades. When you trade low probability setups the odds are staked against you and that means you are going to end up losing a majority of the time.
So, this basically sums up how-to analyze penny stocks and what you need to do to make sure you don’t lose all your money. Now it’s up to you to take the next step.
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