If you want to know how to trade promoted penny stocks without going broke, you need to come to terms with some realities that a lot of people are ignorant of. Once you understand these realities you can then move on to what it is that you need to do and what exactly it is that you need not to do. Let’s get to the meat and potatoes of what I am trying to communicate so you can get on the fast track to becoming a successful penny trader.
Realities of promoted/pump and dump penny stocks:
-Promoters of these penny stocks often have criminal records (or they will in the near future)
-Many promotions involve money laundering
-Fake press releases are used to generate excitement about promoted companies
-People involved in these schemes do not care if investors or traders lose large amounts of money
-Penny stock newsletters that pick these stocks are compensated to do so (in most cases)
-These stocks can be halted without warning by the Securities and Exchange Commission due to fraud claims
-You can be charged hundreds of dollars to trade them depending on your broker (I will address this further below)
Now, if you are still brave enough to want to try your hand at this type of trading, I can give you a few valuable tidbits of information that will help.
What you should do to be successful as a trader of promotional penny stocks:
-Open a trading account with a broker that does not charge extra fees to trade them (Etrade works well)
-Sign up to a handful of free sites that send out these types of picks with a separate email account (I like Gmail)
-Watch these picks as they come and go for about a month (then you will realize who the good promoters are)
-Buy the promoted stocks early in the promotion and sell before the promotion reaches a peak (they usually last 1-4 weeks)
-Use limit orders to buy and sell and only buy on pullbacks (do not chase stocks as they go higher)
-Learn to benefit from real time charts and level 2 quotes
What you should not do to be successful:
-Buy the first stock you see being touted in a promotion
-Believe the hype surrounding any company that is being “pumped” (treat it as a trading vehicle not an investment)
-Put more than a quarter of your trading capital into one pick
-Advise friends or family to buy (you want Thanksgiving dinner to be pleasant, don’t you?)
-Adopt a “buy and hold” mentality (you need to get in and get out!)
Now I am not so naive as to think that you will be an expert just because your read and comprehended what I just outlined. It does take time and a bit of dedication. Ironically enough, however, trading these types of stocks can be incredibly lucrative. Once you get comfortable with them, you will find that it can be easier to succeed as a pump and dump penny stock trader than as someone who invests in companies that trade on the “big boards” such as the New York stock exchange. There may be several types of these plays that you can trade at any given time, or there can be droughts where there is no real penny stock promotions going on. The key is to stay on top of current promotions and to always be nimble with regards to your entries and exits in these types of equities.