Correlating Promoters Part I

It has been a while since I've look at penny stock promoters so I figured I'd get back into the game by tracking the performance of the various promoters. Back in the day, there were a few big name promoters like Awesome Penny Stocks, Best Damn Penny Stocks, etc. I know many of those guys fizzled over time and became less effective as their notoriety increased.

To see who (if anyone) has taken over this niche with effective stock promotion, I'll be starting from scratch, learning who the players are. If you're new to this site and penny stock trading, I should emphasize now that the stocks being promoted by newsletters are almost definitely horrible companies and should be treated as such. Do not believe anything a newsletter tells you because they are being paid by someone to say it. Read the disclaimers in each email!

Why is this information useful?

There are so many promoters that come and go, it would be a waste of time to track them all. Most of them don't create enough volatility to make trading their tickers worth it. By tracking the performance of various promoters, we can get a handle on who we should pay attention to-- and more importantly, who not to waste our time with.

Ideally we want to find promoters that are able to catalyze significant price moves that will more for good short sells. In all likelihood, a stock promoted by a newsletter is trash and any upward movement will result in future predictable downward movement that we can profit from. We might also consider buying before a run-up but considering the current market conditions, I really, really doubt that will be a viable strategy.

Gather the newsletters

The first step is to gather all the newsletters you can. A simple and effective way to do this is to just search "penny stocks" on google. Click on all those promoted links on the top and on the side that are promising you the best stock picks. You'll want a separate email account for this since we are literally gathering spam which you won't want in the same email account you use for other important correspondence.

One helpful tip about email addresses is that you can amend labels to the email address by using a plus sign. For example, if your email address is myemail@gmail.com, you can provide myemail+whateverlabelyouwant@gmail.com and it will still be considered a perfectly valid email address.

We can use this to our advantage by giving each newsletter it's own distinct label. So when I'm signing up for the newsletter of http://moneymorningresearch.com/, I can give them the email address myemail+moneymorning@gmail.com. This way, if a newsletter shares our email address with any other groups, we can see who we originally gave the email to since it will still have that label with it. In the future I'll post some pictures to illustrate how this works.

Organize the newsletters

Each promoter operates several different stock promotion websites so our goal is to figure out which promoters own which sites. In the past, this was often as easy as reading the bottom of each email to see the name of the parent company. This doesn't seem to be the case anymore which is partly what spurred me to write this guide. I'll try to do some of this work so that others don't have to.

Gmail makes this process easier by allowing us to create filters and labels for each email sender. When you receive an email you'd like to create a filter for, click the drop-down menu beside the reply button and choose "Filter messages like this".

You'll be given the option to make the filter more specific if you'd like. For our purposes, the default will work fine. Click "Create filter with this search" to continue.

The next dialog asks what you'd like to do with the message. Check the box next to "Apply the label" and then select "New label...". Give your label a name that reflects the promoter who sent the email. Since we don't yet know which promoters own which sites, you'll need to create a new label for each newsletter site you subscribe to.

Lastly, we can assign our new labels with colors. This allows us to glance at our inbox and immediately see which promoters are promoting which stocks. This will become more useful as we whittle down our labels to only the most influential promoters.

I'll come back to this and expand on how to use this information in a future post. So keep checking back and in the meantime trade cautiously!

FAQ: I Have A Small Account, Where/How Should I Trade It?

I get this sort of question a lot from people looking for advice on how to get started with a smaller account. Now it would probably be in my best interest to do what everyone else on Wall Street seems to do and feed you some investing strategy while encouraging you to come back to my blog for future tips and tricks. That being said, I created this blog to help people and the best way to do that is this:

Don't trade with less than $10,000!

While it's certainly possible to make money with smaller accounts, I have to strongly discourage it because the odds are simply stacked against you and trading is all about odds. 

I'll explain further.

For small accounts, the fees charged by brokerages represent a larger percentage of your worth than they would for a big account. That translates into requiring a larger percentage gain from your stock trades in order to stay profitable. Here's an example: Small account holder Average Joe buys 800 shares of XYZ at $2.50 a share. Millionaire Max buys 7000 shares at the same price. Within a short time, the price rises to $2.60 for a 4% gain on your investment. Not bad! That's a profit of $80 for Joe and $700 for Max. Unfortunately for Joe his broker charges $7.50 per trade, and $30 dollars a month for software and data feeds. which represents 56.25% of his profit! Those same fees represent only 6.43% of Max's gain.

To compensate for this problem, most novice traders will hold their positions longer, hoping for big percentage gains. Unfortunately, trading isn't that easy and most likely holding longer won't get you any more gains. In fact, you may end up in the red on that trade since more time in the trade equals more risk. In that scenario, all the fees stay constant AND you're going to lose money on that trade. This means that your next trade would need to net you even more money to make you profitable. Thus, your chances of success become less and less likely. You should be starting to understand now that all the little problems traders face are magnified by small accounts. And chances are, since you're new, you're going to be making more mistakes than quality trades.

Small accounts are also at greater risk of going bust than large accounts. You should never invest your entire account into a single trade because you can never be sure if you're right. If trading were that easy, everyone would be making money but the sad fact is that most people lose money because most people don't read this blog. Good traders only risk around 10% of their account on any one trade. If you have less than ten-thousand dollars though, that leaves you with a very small amount to trade and compounds the issue illustrated above. If you go all-in on every trade, you're probably just going to bleed your account into oblivion.

"But hey! I'm making millions on my paper trading account!"

Practicing on paper trading accounts does little more than acquaint you with a particular broker's software. Many of the variables that make trading challenging are diminished or removed in the paper trading world which can mislead you into thinking you're a bit more skilled than you actually are. One big reason is that paper trading is mentally distinct from actual trading because it doesn't punish mistakes in a meaningful way. Introducing the risk of losing your real-life hard-earned money is likely to influence the way you trade. Most notably your ability to accept a loss and get out of a bad trade rather than holding and hoping.

Furthermore, and much less obviously, paper trading diminishes the influence of liquidity and your role in that liquidity (if you want some clarification on liquidity and other basic terms, click here). In the real world, your trade order can influence the price of the stock. While this wouldn't be noticeable if you were trading GOOG, small accounts are probably going to be trading small cheap stocks which are much less liquid. These stocks are going to behave in ways that may not have been apparent in the paper world.

Shorting in particular is not well represented by paper trading. The biggest factor for this trading strategy is the availability of shares. The only way you're going to get an accurate sense of this issue is by actually trading. You have to short early (which is much higher risk) in the real world before the shares become unavailable to borrow. Once the odds are obviously in your favor and the risk is lower, the stock is probably not going to be available to borrow because everyone wants them at that point! As such, these borrows are often only available to large account holders who can manage these higher risk trades. Large losses don't put them out of the game. Shorting also involves borrow fees and fees, as I explained earlier, are bad for the small account holder.

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...

Beginner's Guide To Trading Penny Stocks: Part II

Which stocks do I buy?

You'll want to decide which stocks to buy based on many factors. The elements you choose to favor when deciding if something will make a good trade becomes your trading style. The two most influential things to consider though are the technicals and the fundamentals. Technical analysis tends to be more important for penny stocks so we'll talk about that first.

What is technical analysis?

Technical analysis concentrates on the price action of the stock in an attempt to identify strategic buy and sell points. In other words, you look at how the stock has traded in the past to predict how it will trade in the near future.

This chart is choked by a slew of technical indicators (those straight lines moving across the graph). Each one purports to tell you something different about the stock in question. Luckily for you, most of them aren't worth learning when it comes to analyzing penny stocks.

Basic technical analysis, and what I rely on most when determining my trades, examines just two things: support and resistance.

In this graph, I've drawn lines to mark the areas of support and resistance. They are determined simply by where the stock has been. We can see that the stock hit the one dollar mark twice in the past then bounced back, thus establishing the one dollar area as support. If the stock were to bounce off the one dollar mark again, that level of support would be strengthened. The more times it hits a support level and fails to break below that level, the stronger it becomes.

The same is true of the resistance level. We can see that the stock hit the $1.43ish level twice, then fell back down. We can then say that this stock price is a resistance level. You can also see that the price action tended to hang around the 1.40 level a bit. This is mostly because it's human nature to favor nice round numbers so people set their trades there more often than they would at some other arbitrary number like say $1.37.

So how do you use this new information? Basically you use these levels to maximize your potential gains, and minimize your potential risk. Continuing with the example of the CLDS chart above, you wouldn't want to trade it at it's current level of $1.25 because it's mid-range of it's support and resistance levels. There's no reliable way to predict if it will go up or down from this point so you're better off not trading it. On the other hand, if the stock fell back to the one dollar level you could consider buying because that level offers support. It also allows you to create a logical trading plan before you even enter into the trade. Your plan might be something like, "I'll buy this stock at $1 and look to sell it at $1.40 where there is resistance. If the stock falls below $1, the support level, I will immediately close my position for a small loss."

The reason why your plan accounts for the breaking of support below one dollar is because the breaking, or collapse of support, is a strong bearish sign. It indicates that the stock will go down so you won't want to have a long position in that stock. A long position means that you've bought the stock in the hopes that it will rise in price.

Which stocks do I sell?

Beginner's Guide To Trading Penny Stocks: Part I

Penny stocks are an attractive jumping off point for people who have never traded before because they're cheap. You can purchase a large number of shares with only a little bit of money, which means you stand to gain an excellent return if that stock price rises. While these reasons are certainly valid, we need to explore a little deeper to really understand how a novice trader should be making their investments.

What exactly is a penny stock?

Holy crap. You can buy so much stock!

Browsing the internet will uncover several definitions. The term basically just refers to a cheap stock. Personally, I consider stocks less than $5 a share but greater than around 30 cents to be a penny stock. Stocks under 30 cents might be more appropriately termed sub-penny stocks which should be avoided by the novice trader. Penny stocks are also typically less well known so you might not consider a big name company trading under $5 dollars to be a true penny stock.

Stocks, including penny stocks, are traded over exchanges. You've probably heard of some of the major ones such as the NASDAQ. Each exchange has its own requirements that a company must meet for their stock to be traded on that exchange. Since exchanges like the NASDAQ have more strict regulations concerning what companies must disclose and report to investors and the SEC, you won't see many penny stocks trading there. Instead, most penny stocks appear on the Over-The-Counter (OTC) markets.

Characteristically, penny stocks are more illiquid than other stocks. Liquidity, in this case, refers to the stocks volume, which is just another way of saying how many of that stocks shares were traded. A stock with high volume is basically just trading a lot. In order to be liquid though, that volume must be consistent throughout the trading day. Liquidity is important because it determines how easily you can buy and sell that stock.

Never trade a stock with a chart like this

The chart above shows a penny stock with very low trading volume, meaning it is also very illiquid. You may run into charts like this because they often see large percentage changes which create a tempting illusion to new traders. A stock that is up 250% in a single day might make you salivate when considering how much money you can make if you had just bought in the morning. You start to see the illusion for what it is though when you consider all the factors. The biggest problem is that low volume, illiquid stocks, rarely show a clear trend. They may gain 50% or more from a single trade then 30 minutes later be down 100%. Basically, they're terribly unpredictable and you should just train yourself to recognize which stock charts to ignore.

A trend can be more easily seen here

This chart shows a stock trading with extremely high volume, making it liquid. As you can see, it's much easier to see a pattern which is really the key to successful trading. You can use the pattern of the trading to better predict how the stock may behave in the future and plan you're trades accordingly. We'll go into that more later though.

Beyond just looking at a chart, you can use the more quantitative analysis of a stock's dollar volume. Dollar volume shows the relationship between volume and stock price, which provides a more accurate picture of how liquid a stock is. For instance, a stock that trades 20 million shares in a single day might seem like a high volume stock with good liquidity, but if that stock is only valued at $0.0001 a share, it only traded $2000 dollars worth of stock which is pretty much nothing. Dollar volume is usually shown when looking at stock quotes but you can give yourself a rough idea of it by simply multiplying the days total volume by the stocks current stock price (although it would be more accurate to use the stocks average price for that day). A stock that trades a few hundred thousand dollars a day or more is generally going to be liquid enough to consider trading.


Which stocks do I buy?