Beginner's Guide To Trading Penny Stocks: Part III

Which stocks do I sell?

In many ways, you figure out which stocks to sell using the same methods as figuring out when to buy. You evaluate the price action, fundamentals, level 2, and news/hype.

So say you've bought some shares around 1 dollar because you decided that was a good support level. At this point you should have an idea of how you want to exit that trade based on price action. It would be a good idea to sell your shares if the stock falls below 1 dollar because that indicates the stock is weak or bearish. The closer you buy to that one dollar mark, the less money you will lose should you have to sell out when it breaks below that level.

Hopefully though the stock will go up. There may have been some positive news in the recent past that you think people will take notice of and create more buyers. Their fundamentals may also be strong which gave you reason to believe that the stock deserves to be trading higher (remember though that price action overrides fundamentals. There are plenty of stocks higher or lower than they should based purely on fundamentals). Another good reason to buy could be strong support at the 1 dollar level in your level 2, which further protects you from potential losses as well as indicating buying interest.

In the CLDS example, and presuming the stock continued up, it would be a good idea to consider selling around the $1.40 level because we can see that it is a resistance point. It may go above that, but it may not. And since it didn't go above that level before, you have slightly more reason to believe that it won't so it makes sense to sell there. If you hold your position too long waiting to see if it breaks above that level, you risk missing your opportunity to get out with a profit. Once it does fail to break above a resistance level, other traders will also want to sell their positions and the price will fall.

Once you've comfortable trading, sell points can also mark good positions to enter into a short position. The idea is that you sell the stock before you buy it, thus borrowing it from your broker, then you buy it back later. To do this profitably, you sell high and buy low. Generally shorting is considered more risky though so unless you're sure you understand the mechanics of it, you should first try it out using a paper trading account if your broker offers one.

So how do I find stocks to trade?

...to be continued...