Penny Stocks in 2010
A Market Report on How Trading Micro Caps Will
Change in the Coming Year and How You can
Profit From It
Why Penny Stocks?
A lot of people might wonder why such small cap stocks can be so valuable to a
trading plan. Most people don’t associate anything with the word penny in it with
wealth and prosperity. The truth is, every year another millionaire is made in the micro
cap sector. There’s absolutely no reason why you couldn’t be the next.
But first of all, what is a penny stock and why is it different from normal mid and
large cap stocks? A penny stock or a micro cap stock is a stock that has a very low value,
usually around 1.00 or below, and typically measures its price action in terms of
pennies, hence the term penny stock. Penny stocks occasionally go over a dollar per
share but very rarely stay there and have been known to explode in value from time to
The reason is penny stocks are very low volume stocks. We’ll get into more detail
about what volume is in a bit, but suffice it to say, penny stocks are simply a stock that
fewer people trade, and because of this it is more susceptible to sudden price swings.
When fewer people are trading a particular stock, that means that smaller amounts of
people have a much great influence on the action of price. Essentially it creates a larger
potential for gain than standard stocks.
Let’s make a comparison. An average stock grows about 5-10 percent in a
significant rally. Most large and mid cap stock traders would call that a great trade, and
in reality if you made trades like that on a consistent basis, you could likely be the next
stock market millionaire.
Penny stocks, on the other hand, can typically average a price swing of 30 to 50
percent! That means in a significant rally on the micro caps sector, you could multiply
your gains by up to ten times what a normal stock market rally would do for your
portfolio by trading small cap stocks instead. Are you beginning to see why this is such
a lucrative trading instrument?
Here’s just a couple examples of penny stock rallies and the percentage gain
taken from each one:
Geopharma Incorporated took a huge price swing on the 22nd of January,
resulting in a price rally of 89 percent in just one day!
Medical Care Technologies rallied 6 consecutive days from a low of 15 cents per
share to a high of 53 cents per share, a gain of over 300 percent!
Needless to say, there is plenty of opportunity in micro cap markets. The truth is
anyone who has an active system on which to trade penny stocks can make a fortune by
entering into the market at the right time. The beauty is that these profits can not only
be made so easily with appropriate market timing but also
However, it’s important to remember that while a lot of people might ask what
penny stocks are hot or what penny stocks will perform the best, the majority of penny
stocks are best utilized as a scalping tool for pure financial gain. Don’t try to snipe the
next Google or IBM. The majority of these price spikes are just that and only that, and
you shouldn’t try too hard to find one that will skyrocket 5000%, even though the
opportunity is most certainly there in rare cases.
What’s the Risk?
Some investors would argue that penny stocks are risky and can easily lose you
thousands in the financial markets. I would disagree with this statement only because
penny stocks are not any riskier than anything else you can buy in the financial market.
The only difference with penny stocks is that any risk you have can often be realized in
a much shorter amount of time.
What makes penny stocks so much different and more complex than standard
stocks is the extremely low volume. Volume represents the amount of trades placed on
a particular stock within a certain day. Most mid and large cap stocks have a volume of
at least 500,000 trades per day, whereas penny stocks can often be quite lower, as low as
50,000 trades per day. When you have such low amounts of liquidity and traders
influencing the market, it means that a market change can happen overnight if it is
going to happen.
It would be like if we had to vote on who the next president were going to be
with only 50 people instead of millions of people across the country. Because the vote
counters only have to tally 50 ballots, it would mean the decision would be made much
more quickly. It would also mean that any great influence applied to this particular
group of people would be more quickly represented on the ballot, so if something
suddenly changed a great number of minds within this small group of voters, it would
mean the change could happen overnight and immediately influence the election,
unlike the amount of time it would take to influence millions of voters across an entire
My advice to any new traders would be to keep an especially close eye on any
penny stock trades you have open for any more than a few days. These stocks can drop
quickly and you may realize a sudden loss if you fail to place appropriate stop losses, so
treat it like any other stock but realize that you may lose more quickly than with a
How do I find the Big Winners?
Finding small gains on penny stocks is as easy as reading a chart and watching
for a breakout of a technical pattern, but if you are looking to find the next explosive
penny stock that could skyrocket into the mid or large cap stock range, you are going to
have to look at a number of factors and determine scientifically if this stock is prepared
Word to the wise: don’t get carried away in anything anyone might refer to as a
sure thing. Real traders know that there is no such thing as a sure thing, so hedge
against failure by diversifying your trades well enough that one trade will not seriously
injure your account. If you put your life savings into a penny stock that ends up losing
money, you will feel about how you should’ve felt from the very beginning of the
ordeal: stupid. So be excited that you have the opportunity to multiply your
investments, but don’t put up the entire nest egg in one trade or you could most
definitely end up losing it.
Here’s just a couple of the most important factors you want to look for when
trying to pick the next explosive penny stock:
-Increasing Revenues and Earnings
Companies that are publically traded typically release an earnings report every
quarter to illustrate their financial performance. Keep track of this on any stock you
believe has the power to transform in value and look for a trend of increasing revenues
and better earnings for the company. This means the company is growing, even if the
stock is not yet going up.
-Decreasing Debt to Equity Ratio
Companies that are preparing to break out of a shell and transform into a
wealthy multi-billion dollar conglomerate are typically very good at handling and
reducing debt. A company that can quickly and easily pay out its debts and start
building equity in the markets has a very bright outlook for the future and should
attract value investors from around the world.
The company you are looking at should have a competitive advantage in the
markets. A particularly promising way to insure this might be to look for a company
that has a niche in the market no other company is effectively filling. This usually can be
translated into some form of technology no other company has refined or a style of
business no other companies are mastering.
Take a look at the overall market and find what the most promising industries
for growth based stocks are. If the sectors with the current highest levels of growth are
the same as the sector in which your penny stock is located, it’s a good indication that
this stock has potential.
A company with good earnings is a company that does good business, but if a
company does good earnings and is underpriced, you are looking at a great
opportunity to buy! A low price to earnings ratio at or below 15 can mean that no one
else is aware of just how valuable this stock is, which makes it a perfect buy for a value
-Technical Pattern of Congestion
Typically before a penny stock breaks out of a previous resistance level, the stock
undergoes a pattern of congestion in which price action compress, often times taking on
the form of a pennant or flag. Watch for these technical patterns and buy when the time
is right by waiting for the breakout to confirm. Here’s an example of congestion:
Jayhawk Energy Incorporated compressed at the base of a trough right around
Christmas and was immediately followed by a significant breakout of the pattern.
Given the fact that this penny stock had just announced new acquisition of oil drilling
and natural gas mining territory in North Dakota, it was clear that a breakout was due
to occur at some point.
How do I trade Penny Stocks?
The best way to trade penny stocks is to time the breakout with limit orders and
exit after realizing a quick gain. Penny stocks are for scalping, no for holding onto. The
majority of the penny stocks illustrated here have at some point gone back down
significantly in a market correction where the stock became overvalued. The key is to
exit the trade at this point in time before the market corrects the equity you have in the
trade and you lose money. With penny stocks, market timing truly is the key.
Many significant breakouts can occur within a couple of hours and be finished
before the majority of traders have had a chance to cash in on them. For that reason I
recommend getting an accurate alert service like the penny stock alert service I use. If
you don’t know when a stock is going to break out and don’t have accurate market
alerts to let you know of a possible trend forming, you don’t stand a chance at getting in
at the right time.
Here’s how I recommend trading penny stocks: find a stock in your alert service
that has been flagged green for buying and place a limit order on it just above where it’s
currently trading. This allows your trading platform to wait for the breakout to occur
before buying into anything. Immediately after placing this limit order, place an
additional limit order to exit the trade at a quick 20-50 percent profit just before the rally
appears to have peaked. You don’t want to wait until the rally is at its peak for a
number of reasons:
1. Stocks fall faster than they rise. It’s a common saying in stocks that bulls go up the
stairs while bears fly out the window, meaning a bull market is typically patient and
trudges upwards gradually whereas a bear market implodes with fear within seconds.
Be aware of this and do yourself a favor by exiting right before that implosion happens
to insure your exit trade gets filled.
2. Order placement may take a while when volume spikes, especially if you are trading
a large number of shares. Brokers process orders in the order they are received, so if
you are behind several large orders of 10,000 shares or more, your market timing may
Enter the trade as soon as the breakout occurs and exit it right before the peak of
the rally occurs, and you should walk away with a safe profit that will net you most of
the market trend safely and without incident. A single trade like this can land you 20-50
percent ROI in a single day of trading. Just remember, if you get too greedy, the
market may punish you for it later.
Types or Orders
There are two main kinds of orders you want to be aware of when trading penny
stocks as each one has a specific purpose in trading. There is a time for both to be used
in the markets. The question to ask is what is more important, immediate entry into the
market or a guaranteed price to enter into the market. Typically the latter is more
important than the former, but sometimes when a penny stock is about to jump it pays
to get in early.
This is an order that guarantees a price but not a fill. What that means is that the
limit order secures you a price at which you will buy the stock, but if there are too many
orders before yours and the market price is fluctuating too quickly, you may miss your
chance to have your order filled by a buyer or seller. Keep this in mind when trading.
Limit orders are an effective way of entering into a trade with caution but can also mean
losing opportunity if you are too cautious.
This is an order that guarantees a fill but not a price. A market order will
aggressively seek out anyone buying or selling a particular stock and sell it to them at
whatever its current market value is. This is a great order to place when you know you
are in a great position to enter a trade and don’t want to wait for a fill to occur.
A stop order or a stop loss is an emergency order you place on the trade that
automatically exits the trade when you have lost a certain amount of equity. These are
important to have in a disciplined and rational trading system. Be sure not to get caught
up in overconfidence enough to not place a stop loss in your trade with penny stocks as
a collapse can happen literally in seconds.
How to Use an OCO Bracket
My personal favorite way of trading is to use an OCO bracket or one cancels
other bracket. This is a conservative trading strategy that gives you a guaranteed range
of motion which your stock can travel before you will either exit with a profit or exit
with a controlled loss/minimal profit. Having this keeps you very safe in a trade.
An OCO bracket essentially works by placing one limit order and one stop order
on a single trade, the limit order being placed at your expected profit point in the trade
and the stop order being placed at your emergency exit point. After one order is filled, it
automatically cancels the other so it doesn’t fill as well, hence the term one cancels
I recommend trading these with penny stocks in a particular range every time
you enter a trade. The forecast for the stock will tell you what this range should be and
help keep you out of trouble, but it’s a matter of you having the discipline to follow
through with your trading plan above anyone else’s advice that will save you should
your trade turn against you.
What are the Hot Sectors this Year?
In 2010, there are two particular sectors in the stock market that have my full
attention. These are sectors that are poised for growth, are all looking to develop an
edge on the competition, and can be scalped overnight for significant profits in the
event of a rally. Look to these two sectors primarily for your best winners.
Biotechnological advancements in various methods of health care are rapidly
advancing and developing a powerful niche in the economy. Because of extreme levels
of volatility regarding the development of new drugs, therapies, and treatments for
various diseases, pharmaceutical companies are a great pick for scalping penny stocks
and turning up quick profits.
Pharmaceutical companies have always had high history of volatility. The reason
behind this is the fact that every company in the health care and biotechnology sector is
constantly working to develop a powerful cure for a disease of some sort. The amount
of excitement that builds as a result of this intensity can be quite powerful and visible in
the price action of a stock associated with such a company.
In 2010, tracking pharmaceutical companies can make any trader poised to pull a
quick profit out of the markets by waiting for just such hype and events to occur, then
scalping the stock at key points in the rally to maintain healthy profit margins while still
remaining safe and protected in a trade. Keep an eye out on this sector for aggressive
winners in the micro cap sector.
In the 20th century, the human population multiplied itself six times over. This
was the direct result of advancing technologies providing solutions that greatly
impeded on human survival in the world. The sudden increase in growth of the
population hasn’t stopped since, and with more cities in the world today than ever
before, the need for powerful, renewable energy is increasing.
Energy is a profitable sector in penny stocks for 2010 much for the same reason
that pharmaceuticals are. These companies are constantly developing new technologies
to provide solutions to issues concerning the majority of the population. Increasing
concerns towards environmental issues have lead to a renaissance in the development
of clean energy solutions, and playing this sector effectively can help you profit off of
Just keep in mind that much like pharmaceutical companies constantly bordering
on having the cure for cancer, energy companies are constantly bordering on inventing
the next great, powerful source of clean energy. It is quite likely the vast majority of
these manias are just moonshine, and should only be used to scalp a quick profit off a
small stock. Love and devotion may work for your personal life, but don’t try and make
it work for your trading plan.
Where do I go from Here?
For most people out there who are just learning to trade or still haven’t mastered
it enough to quit their jobs, trading can be a risky venture for them. It’s a very uncertain
world we live in, and sometimes it’s difficult to find what the next step should be in
your journey. I want you to be successful, and in order to be successful you need more
than just great ideas and hard work. You need a plan.
Here’s how I view the plan of a great penny stock trader in the making and
where you should take your trading skills from here:
Step One: Education
Read as much as you can and absorb as much as you can for the first couple
months you spend trading. Immerse yourself in the work of great traders and try to
imitate their methods as best you can. If possible, buy a trading system like the penny
stock system I use to maximize your gains while still keeping you within a system that
was developed by a more experienced expert than yourself. The more you read, the
smarter and more prepared it will make you for the financial markets. If you can take
some classes or attend some seminars here as well, that is even better and will empower
you with knowledge.
Paper trade for at least a month before you live trade. As soon as you’ve
developed the ability to paper trade and keep a consistent trade journal without losing
all the money in your simulated account, you are ready to live trade. Just keep in mind
that may take a few months of practice before you finally stop making poor trading
decisions, and those poor decisions will hurt you even more if you make them with real
money. I recommend waiting until step 3 to live trade.
Step Two: Learn a System
A great trader’s first goal should be to merely imitate the experts who have
already made money in the financial markets. In much the same way as a martial artist
must stick to a rigid, inflexible system when first learning the methods to fighting, so
too must a trader stick to a well defined system when first trading. You can learn a lot
by imitating the success of others.
At this point, you have to get your hands on someone else’s methods. There is no
substitute for a well researched trading plan, and having your own discretional trading
plan to guess your way through the markets can crater you financially. Until you get to
the point in your trading skills where you have the knowledge and expertise to develop
your own plan, trading someone else’s plan is probably for the best. Practice simulated
trades on this system until you feel confident enough
If you aren’t sure what methods to imitate, check out my blog where I test drive
and review great trading systems to find what systems work and what systems are
Step Three: Live Trades and Build a Trade Journal
Your third step after learning to trade a system well is to transition this system to
a live account with real money. Your goal should be to treat this entire process like a
business. Analyze your performance based on profits per month and observe what
trades are making you money and what trades are losing you money. Over time, seek to
eliminate the rocks from your trading journal and imitate and repeat the gems over and
over for years to come. This will solidify you as a great trader.
Step Four: Replace your Current Income and Escape your Job
Once your trading business begins to flourish, you will start realizing a
tremendous income from it every week. As this income grows, take more income from
your current job and keep putting that money into your trading account to increase
your returns each week. Over time, your trading will replace your working in whatever
field you are in, and you will eventually be able to quit your job and escape the rat race.
If you make it to this step, then you have experienced all the financial freedom
and joy that trading has to offer. You no longer have to listen to a boss, be away from
your family for days or weeks at a time, or have a predefined scheduled. You’ve found
peace as a trader and your life won’t ever be the same. That’s the true goal. Make it
your goal in 2010 to realize this dream, and if you need any support or
recommendations on what to do while you’re working your way there, be sure to check
out my blog at www.tamingthemarkets.com for free advice and articles.