This chapter starts to really get into the nitty gritty of trading penny stocks. Its starts out with a continuation of terms and definitions. As well as more what I would call “market mechanics”. Descriptions of bid ask spreads and Level 2 as well as market depth and routes. Tim goes into a basic introduction of Level 2 and breaks down the montage box. He does not go into that much depth which I think is a good thing for beginners. As a newer trader you need to know what a Level 2 box is and how to interpret it, but I often see newbies thinking there is some “magic” to be found in Level 2. I agree with Sykes that it is a tool you should understand, but you should also not spend hours trying to find some information that just is not there.
After that Sykes starts covering why penny stocks are the best trading vehicles and describes why “real” companies and higher priced stocks just are not worth the time trying to find a trading edge. While I have traded many higher priced stocks at many times, usually there is some huge catalyst and panic or exuberance that makes them tradeable in a short term sense. Most of the time any stock that is $20+ is priced pretty much accurate and will not move as sharp or as predictably as a pumped up penny stock. Tim does a solid job explaining this as well as introducing the concept of support and resistance to aid in entries and exits. There is a quite of bit of time spent on trying to locate breakouts and breakdowns and a very useful description of why to not chase if you miss these moves. Over the last few months I have made a committed effort to NEVER chase and this segment helped me confirm this strategy.
Roughly the middle third is spent detailing more market fundamentals like technical patterns and indexes to follow. Solid advice from Tim to not obsess over indexes/ETF’s, commodities, etc but to simply use them as a tool to get an overall feel of the market.
The final third starts to get into really how to find and trade a penny stock. Sykes goes over using the percentage gainers list to find trades. Whether that be from Yahoo Finance, Old Stockstotrade/Equity Feed, new Stockstotrade or any scanner that will show the biggest moves in stocks less than $10-15. There is solid discussion on the why of only trading volatile stocks with volume. And ignoring either low volume stocks or just stocks with no volatility. Tim starts to present examples and show’s charts detailing what a good setup looks like ($HGSH,$LQMT).
This chapter wraps up with very useful points of ONLY focusing on the best most volatile setups and creating the discipline to only trade if there is something worth trading. Overtrading and boredom trading can be one of the biggest issues facing a new trader. If you get into poor setups with low volatility and/or volume you will at best waste a bunch of time, and at worst get poor exits because of trying to fight a setup that just isn’t there.
I enjoyed this chapter and felt it would be very useful to the new trader or the trader that is migrating to trading penny stocks. This is purely arbitrary but I think one of the most common questions I get is how to pick which penny stocks to trade. And Tim goes into great detail on the how and why of choosing a penny stock as well as the mechanics of locating them and weeding out the mediocre setups.
Rating: Another 4 out 5 for the beginning trader. 90% of the content was very useful and could be applied right away.
More term definitions
-Need volatile stocks
-Leverage/margin – Steroids for stocks
-200,000-2M shares a day
-definition of “tape painting”
Routes/Rebates – scalping
-Das Montage box – broke down in detail
Breakdown of ticker info – basically Y Finance “Key statistics”
Good description of value investing vs Trading
Some basic fundamental analysis – though not used that often in trading this is useful to know.
Good discussion of boring “real” stocks vs penny stocks.
Stats to watch
Good quote – “The best indicator of today’s price is yesterday’s price”
“Ignore steady solid companies, because they are accurately priced”
More fundamentals breakdown
-Good to know, but a little boring
Supply and Demand discussion – on a chart
-what moves stocks
Basic Support/Resistance discussion
Charts are the best part of finding an edge in trading.
Best to only watch stocks when they are at key breakdown or breakout levels, otherwise ignore chop.
How resistance can become support etc.
Good discussion of “chasing” and why not to do it.
Breakout discussion – examples
Breakdown discussion – examples
First discussion of “forming a thesis” or creating a plan
Technical patterns – descriptions
-Cup and handle
-Double top/triple top – good discussion of bag holders selling at “breakeven” at failed breakouts
-Head and shoulders
Indexes – good to follow but not trade
-Need to keep an eye on indexes since 3 out 4 stocks will follow indexes.
-Good to use to decide on entries/exits/stops
-DJIA – top 50
-Nasdaq – tech
-Russell 2000 – biggest small caps
-Wilshire 5000 – small caps and microcaps
Other poor instruments – as a small trader
Why trade penny stocks?
-Under the radar
Types of stocks
Poor edge types of stocks
-biotechs with pending announcements
Description of other sectors/instruments with poor edge
-Closed End Funds
Beginning of penny stocking how to:
How to find the tickers to trade:
-big % gainers – Yahoo finance etc
-Only the stocks that are moving are worth trading short term
-Etrade pro gainers list // all software has this or similar
-Focus on low priced volatile stocks
-$2-$10 per share
-up 20% plus a day, 100%-200%++
Volatility/gains first then news
-news is pointless unless the stock is moving
-trading the news if the stock is not running/crashing ignore no matter how good it looks
Break down of HGSH from fall 2014
Breakdown of Yahoo Finance percentage gainers
-how to weed out tickers – low volumes/sectors etc/high priced/low priced
Demonstration of “old” Stockstotrade – Equityfeed
2:56 First reference to me 😃 and part time trading
Discussion of focusing on the best setups
Paid scanners are great, but almost any free stock site will give you a list of the percentage gainers.
LQMT discussion – example of hype/momentum based on $AAPL news etc.
Penny stocks – huge opportunity but need to be prepared and ready
E-trade Pro desktop setup/layout