In recent times, I have seen many people online claiming to be great traders who don’t know what they are talking about. A majority of these folks have only started trading during the pandemic, while stocks were going through a raging bull market. This market has been so easy to it has allowed in-experienced traders to make millions by just being at the right place at the right time.
Most of these so-called traders are lazy and would never spend the required time tracking data to develop real trading strategies to profit in penny stocks. For this reason, many of these individuals will lose all their money long before they ever learn the actual skills needed to flourish as a trader.
Quick Profits
New traders want a quick fix. They want to follow alerts and end up millionaires by the following month without actually putting in any effort. The strange thing about trading is that sometimes, the penny stock market actually rewards people for this misconception. Indeed, at times, new traders get into the market when it is ripe and end up looking like pure geniuses, even though they have little if any understanding of how the market actually functions.
Sure, some opportunities can arise from this crowd mentality, which has swept over the market during the pandemic. But when friends and relatives started coming to me asking how to get involved or when to buy and sell, that is usually how I know that the easy money had already been made.
When you have no idea how to trade it is best to avoid the common pitfalls of the get-rich-quick seekers.
Trading Blindly
Most of these traders don’t have a trading system and trading strategies, and the few who do have absolutely no clue whether or not their methods have an edge. Instead, they think that just because it came from an infamous trading guru on Facebook or an extravagant website with a high price tag, it has to be trustworthy.
They think they can use discretionary trading strategies to extract money in penny stocks but have no way to test what they are doing, which is exactly why most of them lose all of their money.
You’ll often hear people say things like, “You should only trade price action because technical indicators are lagging.” Although it is true, basic technical analysis is outdated and will no longer allow you to profit in penny stocks. Therefore, you shouldn’t trust anybody who tells you to trade based on candlestick patterns, the 50 and 200-day moving averages, or anything else basic like that.
The truth is, this stuff hasn’t been profitable for two decades. If trading was as simple as waiting for two green candlesticks and going long or buying at the breakout above the high of the last ten candlesticks, there wouldn’t be so many people working 9-5 jobs. The key to success is to realize that you can’t use the same tactics as everybody else and beat the other losers.
Luck vs. Skills
The truth about most beginners’ luck is that they don’t know how to trade and have often just taken oversized risks which, fortunately for them, have paid off. But all it takes is for one mistimed trade to end a trader’s career.
Therefore, you must ignore the “get rich quick” mentality, and instead, focus on learning an actual process centered around how to manage your risks. Few people will tell you this because most of them aren’t actually profitable, and therefore, have never figured out this crucial concept.
In a regular market environment, where the government isn’t handing out trillions of dollars of free money, stocks don’t just go up every day. The financial markets have experienced a major bubble, the last of a similar magnitude dating back to twenty years ago.
Stock Market Bubbles
A stock market bubble is a cycle in the market described as a sustained increase in market value far beyond the historical range. What causes bubbles is an increase in prices due to irrational behavior. When bubbles occur, prices typically rise to a greater level than the intrinsic value, resulting in a divergence from the true fundamentals.
Although bubbles are rare, at any given time, individual bubbles are normally occurring in various penny stocks. The common denominator between every single bubble in history is that all of them eventually pop.
Therefore, you must have some type of trading strategy to earn money in penny stocks because once a bubble deflates, luck will no longer be on your side.
Long-term Success
To achieve long-term success as a trader, you need a trading system with an actual repeatable process. Without this, your chances of staying involved in the markets in the long term are near zero. Nonetheless, so many people on social media talk about quitting their full-time jobs to become traders.
These individuals are under the false assumption that following some gambling junkie from Wall Street Bets into YOLO trades is a winning strategy. They think that their ability to profit from meme stocks over a short period will translate into profitability for life. But sadly, it just doesn’t work like this.
To be a consistently profitable trader takes effort and a lot of time. You don’t learn how to trade in a few months; sometimes, it can even take several years. You can’t earn outsized returns consistently either if you are trading with a small account.
For example, if you think you can start with $500 and replace your six-figure salary, you are completely delusional. It takes having a significant amount of starting capital to make money, and there’s no denying the fact that you need realistic expectations regarding potential returns.
Don’t Follow Gurus
And then, there are the penny stock gurus. Most of these self-proclaimed trading “experts” spit out technical terms to make it seem like they are sophisticated in market analysis when in reality, they are just experts at marketing their snake oil to unsuspecting newcomers.
See the people who post pictures of themselves with fancy cars or private jets on Instagram or Facebook? These are the few people who got lucky during prior bubbles without having any actual trading strategy of their own. Later, they realized that to continue to make money and stay wealthy in the long term, they had to become online marketers in order to push their useless trading alert services.
Most of these people either don’t actually trade or don’t trade successfully. Instead, they build communities of unsuccessful and naive people and capitalize off of the simple fact that front-running their subscribers into low-float penny stocks is a viable strategy.
Since a new sucker is born every minute, these gurus have stumbled upon the realization that consistently losing traders will throw money at anyone who “seems” to know what they are talking about.
Avoid Social Media for Stock Picks
If you look at social media, you will find countless videos about basically every topic you could imagine regarding trading. The unfortunate part is that most of the information is nonsense, which is downright dangerous. For instance, some people explain the basic technical analysis and claim that they turned $1,000 into $1,000,000 with a simple technical indicator.
Then, there are people who, on the surface, seem like they know what they are talking about because they appear to know all the financial jargon that the average person is not yet familiar with. In the end, most are just trying to sell their overpriced products because that’s how these people make money.
Trading Is Not Investing
When searching for trading strategies to get profits from penny stocks, you need to understand an important concept: If you are a trader, you are not an investor but a speculator.
You are speculating on the direction of stocks in the future by accepting the risks associated with the possibility of earning a profit. You are only attempting to project the future short-term price so you can capitalize off of inefficiencies.
Speculators are important because they provide added liquidity, which is used to turn stocks into cash and cash into stocks without affecting the price by a significant amount. Liquidity is imperative for a market because it brings in more eager market participants and lowers transaction costs.
Trade Like the House
To come out ahead as a speculator, you must position yourself in a similar fashion as the “house” of a casino. On every bet, the house has a built-in advantage. Although it sometimes takes losses in the short term, the more players go up against the casino, the more money the house makes.
The learning curve for traders is a lot tougher than most people realize. Some people spend twenty years trading and never figure it out. Markets only exist if the portion of money one person wins equals the amount that another person loses. This is the definition of a zero-sum game. So, if you want to make a $10,000 profit on the trade, some other chump has to lose $10,000. This means trading is very competitive and shows why you shouldn’t try to trade unless you are going to take it very seriously.
Trading is Tough!
I won’t sugarcoat the reality of finding trading strategies to extract profits from penny stocks. Trading isn’t easy, and it isn’t something that everybody can do. Sure, anybody can open a trading account through a brokerage like Robinhood and begin trading penny stocks in a short period. But although some people may win, most won’t be that lucky.
The handful of people who take trading seriously and treat it like a business instead of a hobby are the few that MAY come out ahead. But, for every five people who win, another ninety-five fail.
If you use trading strategies to earn money from penny stocks that have a statistical edge and follow them at 100%, you are guaranteed to profit in the long term. It is this component of the market that provides a built-in edge.
If you want to improve your edge, you must identify the number of risks and rewards that can realistically occur. When starting out in the market, although there are many trading strategies to profit in penny stocks, it is near impossible to know what actually works. To get an advantage over your competition you should download this free ebook.