How to Trade Penny Stocks

In this article, I’m going to show you how to trade penny stocks. I’ve been trading penny stocks for a few years and made decent profits with the following penny stock strategy. I only trade penny stocks that are listed on the major stock exchanges such as NASDAQ and NYSE. I don’t trade OTC penny stocks or Pink Sheet penny stocks because they are way to risky.

The most important lesson I learn about penny stock trading is that in order to make money consistently, your mindset is much more important than your trading strategy. Most people lose money trading penny stocks because they don’t have the right mindset.

People trade penny stocks because they want to get rich overnight. They see a penny stock that’s making a 100%, 200%, 500% or even 1000% gain in a short period of time, and they thought that’s the norm. In reality, penny stocks go bankrupt on a daily basis and many get delisted from the major stock exchanges or moved to the OTC market. If you are holding one of those stocks, your stocks will go down and you may lose all your money.

So what’s the right mindset? The mindset is that you will never try to get rich with one stock or a few of them, and that you are not going to get rich overnight. Your goals is to make consistent and smaller gains for each penny stock you trade. It is much easier to make a 20% gain on 5 penny stocks than one penny stock with a 100% gain, yet they achieved the same results. You will also need to learn that it takes a lot of practice and study of stock charts in order to make this kind of gains consistently, it doesn’t just happen overnight. Before we go on to penny stock trading strategies, I just want to make sure that you understand this is not an article on how to invest in penny stocks, so I won’t talk about any fundamental information such as income statements, earnings report, revenue and sales growth because they are irrelevant to my strategy. I will only focus on the technical analysis which is about stock chart setup, price and volume movement of the penny stocks.

How to Buy Penny Stocks

Now we got the mindset out of the way, let’s move on to the penny stock strategies that I’m using. First, I build up a list of penny stocks to watch with the following criteria.

1. Penny stocks that are trading in the range of $0.8 to $5 and trading on the NASDAQ, NYSE or AMEX exchange.

2. The penny stocks must have a single day where it spiked over 30%, and at least a 80% gain over one or multiple consecutive days within the past 20 days. In addition, the trade volume must be at least 8 million on the spike day and it should be much higher than the average trade volume. In other words, the penny stocks have to spike with unusual high volume.

3. The penny stocks are now falling over 40% from their recent high with low trading volume, much lower than the day it spiked. This is very important.

I will now watch these penny stocks on my watchlist and wait for them to drop over 50%. If I like the stock chart pattern, I will put a limit order to buy the penny stock. Since the trading volume is much lower now, sometimes it might take a while to get my orders filled. Also, I put a limit order to sell my stock as soon as I bought the stock. The limit order is for profit taking and my goal is 20% for each trade, I use mental stop loss in case the trade goes wrong. When a penny stock gap up, I end up making more than 20%. I made 35% on a recent trade and then another for 55% gain when they gapped up the next day.

Penny Stock Strategy

Let’s look at some of the stock charts  for my winning trades recently and discuss my penny stock strategy in more details.

1. HTGM – The stock spiked with huge volume on 3/24 with an intraday high of $13.25. The stock then dropped over 40% with low volume the next few days, so I added to my watchlist. I bought the stock at $5.35 on 4/5. Unfortunately, my order only got filled partially that day meaning there weren’t that people selling at that level by the time I setup my limit price to buy the stock. As soon as I bought the stock, I put a limit price to sell the stock for 20% profit from my entry price. Guess what, the stock hit my 20% target the next time and I sold my shares. The stock went much higher after I sold my share and then retraced. Note, I didn’t sell the stock at a higher price but it doesn’t bother me at all because I knew it is much easier to hit 20% than 50%. You will never be able to predict the high of the day, don’t let your emotions such as greed take over you.


2. ZAIS – The stock spiked over 30% on 2/14 with huge volume and then it retraced the following few days with very low volume. I added the stock to my watchlist when it dropped over 40% and then bought the stock at $2.36 on 3/20. Again, I set my limit price to sell for $2.83 as soon as I bought the stock. The stock continued to go down after I bought it and then it gapped up on 3/24, 3 days after I bought the stock. The open price was much higher than my limit price and I ended up selling the stock for $3.64 with a gain of 54%. Again, the stock kept going up after I sold my stocks before retracing. Imagine if I were to keep holding the stock, my profit would have been erased in the next few days. Remember, there is usually only one chance to sell, if you missed it, you may turn a winning trade into a losing one. So always set a limit order to sell your stock, so that you don’t have to watch your stocks all the time.


3. INNL – The stock made a move with huge volume on 3/13 and then it made another high of $2.58 3 days later on 3/16. Note, my 40% and 50% rule is based on the highest price of the recent stock price so it would be based on the $2.58 on 3/16. The stock then went down the next few days with much lower volume. I ended up buying the stock at $0.99 on 3/27 and sold it 2 days later for $1.33. Again, the stock gapped up and I made 34.4% which is more than the 20% limit price I set. Few days after I sold the stock, it was trading at almost $2.5 which is over 80% more than the price I sold. Like I said, it doesn’t bother me at all because I made a profitable trade.

Note, I don’t automatically buy a stock when it dropped 50% from the recent high, I would study the chart and try to get in as cheap as possible. Of course, that means I would often miss some profitable trades, but it also prevents me from entering bad trades.


4. ZSAN – The stock made a big move on 2/13 with over 40 million trading volume, and then it made a new intraday high 4 days later at $3.54. In the next 10 days or so, the stock retraced over 40% with low volume and I added to my watchlist. I bought the stock on 3/20 at $1.65 and sold it 3 days later for $1.99 for a 20.6% gain. The stock kept dropped right after I sold and never came back up for the next month. Therefore, it is important to always follow your rules and set a limit price for profit taking right after you buy the stock. This way, you will never miss a chance to sell and also force yourself to be discipline all the time.


When to Sell Penny Stocks

You should always have a plan when you trade penny stocks. We already talk about profit taking earlier, let’s now talk about stop loss. Whenever you buy a penny stock, you should have a stop loss in mind. Not every trade is going to work out no matter how good your trading method works in the past. Here are a few selling strategies that I use.

1. Stop Loss – My stop loss is 12%, so whenever a stock drop 12% after I bought the stock, I would sell it. Remember, 12% is a big stop loss to take when trading stocks. However, penny stocks are very volatile, so a bigger stop loss is required otherwise you are going to get stop out often only to see the stock turned around and make a big move. Stop loss is absolutely necessary, you don’t want to have 1 or 2 losses that kill your account. Each trade is only one of the many thousand trades that you are going to make. The only way you can do that is to preserve your capital, and not let a few bad trades take away all your money. Remember a 50% loss requires a 100% gain just to get even, it is much easier to take a loss when it is still small.

2. Time Limit – My maximum holding time is 10 trading days. If a stock I bought doesn’t make a move in 10 days, I’m going to sell it no matter how great the stock chart looks like. As I stated above, penny stocks are very risky. As long as you are still in a trade, you are risking your money. If a penny stock doesn’t make a move quickly, I’m going to sell it and look for other opportunities. There are always going to be other penny stocks that matched my setup requirement, I don’t want to tie my money to the ones that are not working.

3. Go up sharply and then retrace on the same day –  If I bought a stock and it went up sharply in 1 day and then retraced on the same day, I would sell it immediately even if it didn’t hit my target price. For example, let’s say I bought a penny stock today, and it drop about 7-8% in 2 days, and then on the 3rd day, the stock moves up sharply to about 25% compare to the previous day (it didn’t hit my target price yet because I was down 8% the past two days) and then it starts to go down, I would sell it immediately with a limit price. In my experience, the high of the day for that penny stocks is probably the highest price for this stock. There is a good chance the stock will keep going down the next day or even gap down. So I must sell the penny stock on that same day.

4. Chart Setup is broken – If I no longer like the stock chart, I would also sell it. For example, when the stock drops below the previous support but didn’t hit my 12% stop loss yet, I would sell the penny stock anyway.

How to Find Penny Stocks

You can find penny stocks to watch with our penny stocks search or top penny stocks for the top 10 penny stocks. If you have an iPhone or android phone, you can install the penny stock app for free.

Penny Stocks for Android

Penny Stocks for iPhone

Every profitable penny stock trader has their own trading strategies, but its not the trading strategies that are making them money in the long term, its their discipline to follow their trading techniques and rules. To learn how to become a discipline trader, read top penny stocks rules and the book Trading in the Zone. To learn more about penny stocks, read top penny stock books.

Penny Stock Webinar

To learn more about penny stocks trading, check out this Webinar where Jason Bonds shows how he consistently profit in 1-4 days with a strategy that gains $1,309 per day trading part time.

Penny Stocks Strategy – 3 stock patterns nets $1,309 per day