Does trading penny stocks offer a way to wealth, or is it all scam? The astonishing answer is yes — to both questions!
There is a long debate about the pros and cons of penny stock picking, but here is the short conclusion, a strangely simple trading system:
- Small cap stocks have often a huge volatility. So, with the right trading system penny stocks should offer a great way to make huge gains.
- There are many pump and dump actions going on in the small cap markets, but penny stocks are not constantly inflated. It can’t be different, because prices behave like they do in all markets, just more volatile. They are going up and down…
- …and so we are back to the trading system question.
To make things short and sweet, here is the ultimate penny stock trading system, simple to use and yet more powerful than what all those thoroughly researching stock pickers do:
- Look for stocks that have a historic high far higher than the current price. Those have statistical potential. Right, we are not concentrating too much on fundamentals. Instead we are playing the market statistically.
- There has to be price action. Our stock has to show new signs of life. Again, we do not interpret a chart with precise technical analysis. We just search for newly ignited interest, demonstrated by rising prices and increasing or exploding volume.
- When trading begins to calm down, the stock gets sold. The sell signal is indicated by both a fading volume and a retreating price for some time. If the action is over, the ZenTrader moves on.
- If a stock is priced below a few cents, chances that a price explosion is orchestrated increase drastically. Simply ignore these ultracheap stocks.
- Money management for trading penny stocks means diversifying your trading capital into at least a few stocks. Never use borrowed money or even margin and never short a stock. All these trading tricks will ruin the math.
No fundamental judgement and no chart analysis??
Exactly! We are going to leave the fundamental analysis to someone else who can put more energy into this sort of exploration and then simply filter his trading alerts with the trading rules above. Information about a company is rare and problematic in the penny stock markets anyway. We are going to rely on statistics and a high price potential.
Prices are moving up and down…
…and that is our statistical trump. All we need is a source for penny stock alerts that is somewhat honest.
More than an honest attempt to find good candidates for moon shots is anyway impossible.
Look at larger stocks. There is much more information available about them. The media is talking about them. Analysts are tracking them. Large funds are buying them. And yet, they all make hardly their money back with their investments. On average the typical mutual fund underperforms the S&P.
It is strange and somehow we all know this uncomfortable truth of the markets, but we have difficulties to really believe it and to act accordingly.
For smaller stocks the predictability doesn’t get better. There are many overlooked gems, misunderstood or forgotten companies that are outright cheap in the small cap markets. True, but that doesn’t help much, because it is hard to get reliable information about these undervalued frog kings.
The answer is our statistical trading system:
- Take trading alerts from someone who puts much energy into finding stock with huge potential and has some experience to interpret thin and bogus information,
- and then filter those stock picks with our trading rules above. This two stage process yields alerts that have real statistical potential and requires almost no effort.
So, it indeed makes sense to play the statistics.
With the choice of penny stocks we are also playing the math. Stocks with a huge statistical price potential offer huge possible gains, something like hundreds or even thousand percent. The worst case is only a loss of hundred percent.
For less extreme outcomes there is still this favorable asymmetry. If you use the simple penny stock trading system, larger gains overcompensate smaller losses. The statistical magic of a high price potential does the trick…
Essentially this penny stock trading system is a variant of the Zen Trade system.