TheGreenBaron.com - Investor Strategies - Part Four
20 TIPS & TECHNIQUES FOR TRADING PENNY STOCKS
Proven and Effective Strategies for Maximizing Profits and Minimizing Risk for Trading Penny Stocks
[RULE 1] The “BULLSEYE RULE” – Those who forget the past are destined to pay for it…
Some investors will purchase certain stocks at what they believe is a temporary lower price based on a higher share price the stock was previously at in “the past” with the hope it will soon return to its previous higher price at some point (hopefully sooner rather than later) in “the future”. But the truth is, regardless of what the share price was in the past or currently is in the present, all of your investments are actually based on a hoped for future share price regardless of past or present levels. In other words, will history repeat itself? The same often holds true for not only a stock’s performance but the company’s as well – as often both are tied together. The “Bullseye” Rule is exactly what the name implies; How often does a company hit the “Bullseye” regarding its stated “future” objectives and/or timeframes for achieving them? Specifically, what is the ratio between what a company says it is going to accomplish versus what it actually does accomplish and if by its stated deadline or sometimes even at all? Most media and other official company releases contain what are called, “Forward Looking Statements” – or “Projections”. In other words, the company has publicly disseminated an “official statement” containing a future objective they intend (or hope) to accomplish at some point in the future. Those “Forward Projections” often can and do have a major impact on the share price either immediately or over the short and/or long term. The first and perhaps most crucial step in your “due diligence” is to accurately determine the difference (if any and hopefully none) between what a company says they are going to accomplish and what (if anything) they actually do accomplish as well as how often (or not) they meet their stated deadlines. As stated earlier, you are betting whether or not “history will repeat itself” - for better or worse? Credibility and capability, especially regarding future objectives and achievements can tell you a lot about what the “future” share value might be based on those accomplishments, or lack thereof. Hence the importance of determining how accurate a company is when aiming for their stated “bullseye”? Again, that ratio applies directly to, and actually determines the company’s level of credibility and capability and as is often the case, its “future” share price, which is the main deciding factor (or should be) when deciding to purchase the stock (or not) – including how many shares you are comfortable investing in, at what price and how long to hold them before selling.
Here is a simple test to help determine those factors and which type of, or if at all, “history will repeat itself”:
Step 1: Review all official company press releases, announcements (including social media and newsletters) for the past 12 months and make a list of all forward looking statements AKA promises from the company regarding what they plan to accomplish at some point in the future. Be sure to include all time frames/dates, dollar amounts with each stated future objective(s).
Step 2: Re-review all the company press releases, announcements (including social media and newsletters) for the past 12 months to confirm (or not) whether the company actually did what it calculated it would do and if by when they stated they would accomplish it by.
Step 3: Go down your list and put a green check mark next to each stated objective the company actually accomplished (hit the “bullseye”) and then put a red check mark next to each one the company has yet to, or failed to accomplish. Again, that includes time frames, dates and dollar amounts.
Step 4: Compare the ratio of green check marks to red check marks. Of course time frames, dates, dollar amounts and objectives can and often do change from the original plans. With that said, you should see a discernible pattern of how often a company keeps its stated promises and accomplishments versus how often they fail to (history repeating itself). That “ratio” goes directly to the company’s credibility, capability and resources - especially as it might pertain to any future “forward looking statements” made by the company. Once a “ratio” has been accurately established, it seldom changes. If your check-list looks a lot more red than green – you might want to find a more credible, capable and resourceful company to invest in? There are plenty of other companies to consider with better red to green ratios. They’re out there; you just need to know where to find them and how to identify them. That will be covered in detail in this program.
[RULE 2] PRESS 1 FOR NOBODY:
Test 1: Before you invest your money - invest your time by conducting two simple tests with any company you are considering investing in. The first test is to send the company and/or their designated Investor Relations an email identifying yourself as either a current shareholder and/or interested investor that would like more information about their company. Note the date and time you send the email. If the company takes more than 3 business days to respond then you will have a pretty good idea of how diligent they are regarding other investor/shareholder inquiries and relations – more importantly you will learn how much the company values you, your time and especially your money – not to mention the risk you took investing in their company…or not. If the company does not respond within 3 to 4 business days (or not at all) then you know exactly how much they value and support you and your money – and of course you might consider reciprocating with the same level of “value and support” for their company and stock.
Test 2: Call the company and/or their designated Investor Relations contact. If they do not have a phone number for shareholders or other interested parties to call to talk to a “live person” then they either do not have the resources and/or knowledge to do so, or worse, the interest. If they do have a phone number your objective is to determine how easy (or difficult) it is for any shareholder or interested investor to locate and make contact with a human being authorized (and hopefully knowledgeable) that can officially speak for the company. If you get an answering machine, leave a message, and use the same 3 to 4 business day rule as in Test 1
You’re looking for companies that ideally care enough about you and your money to think you are worth at least a few minutes of their time.
[RULE 3] Unrealized Gains are NOT Losses – But They Sure Feel Like it…Don’t They?
Gordon Gekko was wrong; Greed is NOT good. Every investor at one time or another has lost dollars hanging on to a stock a little too long trying to make a few extra pennies. Remember the words (advice) of Charles Schwab when asked how he made his fortune in the stock market; “By selling too soon”. Here’s the real bottom line when it comes to investing; every sell in the green is a good one…period. It’s hard to lose money selling stocks for more than you paid for them.
Here’s the perfect example of unrealized gains not being losses; let’s say you spend a dollar and buy what ends up being a winning lottery ticket worth ten million dollars. Then on the way to cash it in you lose it (it happens). How much money have you really lost? Ten million dollars, right? Wrong! You only lost the ONE dollar you paid for the ticket - because unrealized gains are NOT losses. This should actually be rule number one when it comes to investing; never count your money until you’re standing at the cash register spending it.
[RULE 4] If There is ANY Doubt – There is NO Doubt:
Even for the most novice of traders, gut instincts can be right the majority of the time. If you have any doubt about a particular investment or company – then chances are the majority of the time your doubts are probably well founded. So strongly consider going with your gut and trade (or not) accordingly. Never underestimate or ignore your “instincts” – they usually know what your head hasn’t figured out yet. We have “instincts” for a reason and they don’t intentionally lie like some people and companies do.
“I rely far more on gut instinct than researching huge amounts of statistics.” - Richard Branson (multi-billionaire investor)
[RULE 5] HOPE is Not a Reason to Buy and/or Hold a Stock.
Do you realize how many investors (not you of course) will just sit there and do nothing while watching their account balance steadily and sometimes dramatically decline? Sometimes for days, weeks, months and even years! We’ve seen it. So, why would an investor just sit there and do “nothing” while their capital disappears before their eyes? One reason may be pure indecisiveness – but unfortunately there’s another reason – “hope”. The “hope” the stock will somehow and for some reason turn around or at least stop dropping. Repeat after me: “Hope is NOT a trading strategy” and it certainly isn’t a reason to buy and/or hold a stock. Later in this program you will learn how to identify specific buy, sell and/or hold signals.
[RULE 6] “Nobody” is Somebody:
They’re the “Somebody” that buys at the bottom and sells at the top (or at least claims to). Trust me, “nobody” buys all their stocks at the bottom and then sells them all at the top - So quit wasting your time trying to be a “Nobody”. If you know what you’re doing and don’t get greedy, there’s plenty of money to be made in between those two numbers.
[RULE 7] Never Count Your Profits Until You’re at the Cash Register Spending Them:
Hence the difference between realized and unrealized gains. One you can spend at the cash register – the other you can’t. However, there is an alternative. It’s called the, “Monday, Wednesday, Friday System” of trading. It’s real simple; Monday you start picking out a new car to buy with all your new-found unrealized gains – Wednesday you wonder where those “unrealized gains” disappeared to while you were busy picking out a new car and Friday your old car doesn’t seem so bad after all. Besides, you’re too late anyway – someone already invented a system for counting money before you actually get to spend it. In fact, they even named a city after it; Las Vegas. Oh, and when they say, “What happens in Vegas - stays in Vegas” - they mean your money. Just in case you were wondering why it’s the only city in America that gives you as much free booze as you can drink just for walking through the front door.
[RULE 8] Santa Claus is Real:
Unfortunately he only comes one day a year and as luck would have it, it’s on a day the stock market is closed. So what does an investor do the rest of the year? To use a sports analogy, short of fulfilling a lifelong goal of being inducted into the Baseball Hall of Fame – stop trying to hit a home run every time at bat. In other words, quit waiting for Santa Claus to show up with everything on your wish list all at once. Too many investors get themselves into a situation where they are entirely dependent upon a single stock to “clear the bases” for them - which is why the overwhelming majority of investors, especially penny stock traders end up losing most if not all of their investment capital and sadly close their accounts and/or eventually quit trading stocks altogether within 18 months of making their first trade. In fact, that is actually the rule, not the exception. Many investors after a few bad trades will get themselves into a “one-trick” pony situation entirely dependent upon that one stock to ride in and save the day (and their account balance) which forces them to swing for the fence with every trade from that point on – usually never getting that desperately needed homerun trade. There’s an old saying on Wall Street, “Bears make money and bulls make money – but hogs get slaughtered”. So don’t be a hog. That’s how most investors get themselves into trouble and the best way to get out of trouble is by not getting into trouble in the first place. Again using our sports analogy; batting averages are determined by the ratio between the number of times you get on base compared to the number of times you get to bat. That’s why your governing trading strategy should be to focus on consistent base hits rather than relying on the sporadic (and rare) homerun trade. Homeruns may win you a game here and there – but enough “base hits” (even without ever hitting a single homerun) will still get you a seat at Cooperstown.
[RULE 9] So-and-So and the Tooth Fairy – Don’t Believe in Either One:
And don’t hold your breath waiting for either of them to give you money. How many stocks have you bought because “So-and-So” promised you there’d be money under your pillow in the morning? And we don’t mean the Tooth Fairy. Always complete (key word = “complete”) your “due diligence” before putting your money where someone else’s mouth is – that’s the Tooth Fairy’s job, not yours.
[RULE 10] How Do You Tell a Good Stock from a Bad One? You Don’t – It Tells You:
Don’t let “I blew it” result from “I knew it” – and went ahead and bought the stock anyway. Red flags are great for parades – but for stocks? Not so much. And every bad stock has “red flags” and they’re usually very visible before you buy a single share – if you know where and what to look for – and showing up here is a great place to start! Conversely, most “good stocks” will have green flags that can indicate the stock is at least worthy of consideration. Red flags can and often do make your account the same color; red - and in many cases vice-versa for green flags. That’s what The Green Baron program and these strategies are all about; identifying any “flags” being exhibited and knowing the difference between the red ones and the green ones. Green flags often lead to checkered flags. Red flags on the other hand often lead to stock loss tax deductions – in fact, they may single handedly put you in a lower tax bracket altogether.
[RULE 11] Fashionably Late Versus Fashionably Broke:
Or as we say here at The Green Baron: Don’t chase – replace. Only in the movies do people hop on board a moving freight train and survive the experience. For example, let’s say you identify a stock that is already up 80% into a current run indicating you’ve found a freight train headed full steam in the right direction and as a result your first instinct might be to try to “hop on board” – it also may indicate the people who boarded the train back at the station (80% ago) may be just about ready to begin de-boarding AKA selling. Especially since 80% ain’t a bad station to do it at – and selling is what slows, stops and more often than not reverses a stock run. If you do encounter a stock that is already up big – even if it is still continuing to climb, the best strategy may be to congratulate the early birds and simply wait for the next train; “replace” as opposed to “chase”.
[RULE 12] Sometimes Better Late Than Never – Is Never:
Especially when it comes to buying a stock based on a company’s forward looking projections and publicly stated future objectives (see strategy 1 above). Everything on Wall Street has a shelf life, which means at some point it expires. That includes stock runs, and sadly, many times a company’s ability and/or opportunity to achieve those “forward looking projections”.
Example: A company (not the rumor mill) announces it is working on a major event or development that will be completed in the next 30 days – and 90 days later you’re still waiting for that major “development” to be announced. Your first and easiest assumption might be that delays are not that uncommon and they’re just a little “late”. But what if that “late” turns into too late – which sometimes can have the same impact on the share price as “never”? As we discussed earlier in this program some delays, especially extended or unplanned ones, can have consequences beyond that forward looking projection being delayed and/or not being achieved at all. Specifically, what else may take place during that delay as a result of it? Well, shareholders may get impatient, hesitant, more indecisive, afraid, confused, go look for and find another stock, or become frustrated and as a result stop buying or even begin selling their stock – and no need to explain what happens when shareholders stop buying and/or start selling. It also means the company can and usually does lose much needed credibility among its shareholders and other interested investors that may be just watching the stock (and specifically that forward looking statement) while deciding when, or even if, to buy in. The company’s “late” news is now old news and any effect the news should have had on the “current” share price has probably already been factored into the “future” share price. None of those are good things. And that’s how being “late” to the party can be just as bad as “never” showing up at all – just like the anticipated “future” stock run.
[RULE 13] Buy on Rumor – Sell on News:
Also called, “BORSON”. This particular trading style is as much “reactive” as it is “proactive”. And if sufficient numbers of shareholders in a particular stock trade accordingly, they do not just “react” but often actually create a noticeable and often predictable result with the stock’s price movement within a short time frame. As a result, some stocks even become trapped in this predictable pattern – and as we discussed earlier; if there is a “pattern” to a stock’s price movements, then there is a way for you to profit from those patterns. BORSON is especially common among smaller cap stocks – and especially among a portion of the shareholder base or other investors closely monitoring the stock and company developments more closely than other shareholders or newly arriving investors normally would. If “BORSON” traders are anticipating news based upon an earlier projection and/or announcement by the company, in particular the positive effect that news may have on the short term share value and trading activity, they will often hold their current shares and/or increase their holdings before and in anticipation of the news being released. Then when the company releases that “anticipated” news regarding the “major development” and the share price spikes on the day of the news release and maybe if the news is strong enough and the shareholder base is large enough, that “spike” may last a few days after the news is released, those traders will sell quickly into the short term spike they anticipated occurring upon the release of the news. Their particular trading style is based on “information” and “timing”. They’ve been following the stock/company close enough, watching and waiting for a soon expected positive development (enough for the company to PR), then make their move…out. Prolonged stock runs usually take several news releases and take and last more than a few days.
If this particular style of trading appeals to you, you’ll need to find a few stocks that exhibit the “pattern” described above and “consistently” provides a sufficient price “spike” on news for you to at least closely monitor the stock for its next and possibly future BORSON opportunities. Don’t forget to set your “news”, “volume” and “price” alerts for every BORSON candidate. Also don’t forget you’ll need to “buy” shares on the “rumor” (anticipation) of news coming at some point in order to “sell” them on the “news” – so you’ll need to closely monitor the trading activity prior to the expected news in order to buy as close to the bottom of the cycle as possible to maximize profits when you sell. That is where noticing “patterns” comes into play - not just the price movement pattern on the day of or following the release of news and not just where the stock usually bottoms out (base) between news events, but also the frequency that company releases news. Many companies often release news at fairly specific and often times predictable intervals/frequency and ideally on most of those news cycles the share price reacts sufficiently for you to make a “predictable” percentage of profit. Keep in mind, real stock runs are more the result of a process than a one-of event. In Penny Stock Land “spikes” are the rule – runs are the exception. (see RULES 3, 6 and 8 above).
[RULE 14] Don’t Be a Pessimist – Don’t Be an Optimist – Be a Realist That Plays the Odds:
So, what are the “odds”? See every rule on this list. What is a “realist”? A trader that “plays the odds”.
[RULE 15] When You Hear Hoof-beats, Think Horses, Not Zebras:
Otherwise known as the “Occam’s Razor” concept; the overwhelming majority of the time the most likely answer is the correct answer. In other words, try to make trading decisions based upon common sense, logic and the most likely answer and/or expected outcome of your decision. Do penny stocks run to a dollar? Sure, it happens. But is it the most “likely” scenario? Or, does it defy logic more than adhere to it? There are too many empty or closed Brokerage accounts because investors bought a stock for let’s say ten cents that ended up dropping to two cents, despite that investor’s hope or expectations (or “So-and-So” told them) it would run up to a dollar. Now, what makes more sense and/or what are the “odds” a ten cent stock will drop to two cents versus a ten cent stock running up to a dollar? If you have been told or have the “hope” that a particular stock you either own or are thinking about buying is about to do something very out of the ordinary – or defies common sense or logic – or is well below the average odds of it occurring, then the “odds” are instead it will do what it has the most likely chance of doing – or what it consistently done in the past. And for every ten cent stock that runs to a dollar there are hundreds or more ten cent stocks that drop to two cents instead. When it comes to any stock – play the play – not the hype or hope. And as we discussed in RULE 14 “play the odds”. Las Vegas built an entire city and industry based just on that one concept – and if the “odds” weren’t the determining factor when it comes to gambling, or as we call it on Wall Street, “investing” - then there wouldn’t be a Las Vegas or a Wall Street.
[RULE 16] Take it to the Next Level – Level Two
What Is Level II? If you just asked that question – do NOT make another trade until you know the answer!
Level 2 (aka Level II) quotes come from a trading service consisting of real-time access to the quotations of individual market makers registered in every Nasdaq listed security, as well as market makers’ quotes in OTC Bulletin Board securities.
When orders are placed, they are placed through many different Market Makers (MM’s) and other market participants (some say “market manipulators” = different discussion). Level II will show you a ranked list of the best BID and best ASK (offer) prices from each of these participants, giving you a semi-detailed insight into the price action, Market Maker line-up, order stacking and if you know what to look for, possible manipulation practices. Knowing if there is more selling interest/action than buying interest/action, or vice-versa, can be extremely useful, especially if you are in the process of executing a trade or considering doing so at that particular time, in the near future, or if at all?
LEVEL 2 can provide enormous insight into a stock's movement/action and if you know what to look for, what the stock is in the current process of doing, or about to do in the very near term – and in this business even a few minutes can be the difference between money gained or money lost. L2 can tell you what type of traders are buying or selling a stock, how “heavy” they are involved, where the stock is likely to head in the near term and much more. In a very condensed description, here is what level 2 is, how it works and how it can help you better understand “open interest” in a given stock.
There are FOUR different types of players in the marketplace:
1. Market Makers (MM) - These are the “players” who provide liquidity in the marketplace. This means that they are required to buy when nobody else is buying and sell when nobody else is selling. They make the market.
2. Electronic Communication Networks (ECN) – ECN’s are computerized order placement systems. It is important to note that anyone can trade through ECNs, even large institutional traders
3. Wholesalers (Order flow firms) - Many online Brokers sell their order flow to wholesalers; these order flow firms then execute orders on behalf of online brokers (usually retail traders).
Each market participant 1 thru 3 are recognized by the four-letter ID that appears on level II quotes.
Why Use Level II?
Short answer: You’re insane not to – Slightly longer answer: Level 2 quotes can tell you a lot about what is happening or about to happen with a given stock as it pertains to share value:
- You can tell what kind of buying is taking place - retail or institutional - by looking at the type of market participants involved. Large institutions do not use the same market makers as retail traders.
- If you look at ECN order sizes for irregularities, you can tell when institutional players are trying to keep the buying quiet AKA “Under the radar” which can be for a variety of reasons (greed being the primary one). It could be anything from a major or positive development within the company to insider pre-news accumulation AKA front-loading. We'll take a look at how you can detect similar irregularities below.
- By trading with the “Ax” when the price is trending, you can greatly increase your odds of a successful trade. Remember, the “Ax” provides liquidity, but its traders are there to make a profit just like you and every other investor out there.
- By looking for trades that take place in between the bid and ask, you can tell when a strong trend is about to come to an end. This is because these trades are often placed by larger traders who will take a small loss in order to make sure that they get out of the stock in time.
· Think of Level 2 quotes as a way to measure liquidity in a given stock based on how market makers are trading. These are the big institutions and computers that pump millions of dollars into the stock market, so paying attention to their positions can sometimes help you get a better idea of what and how to trade.
· There are dangers inherent to this practice though, so buyer beware. Market makers can attempt to manipulate public perception by changing how they trade.
· The “Ax” is the Market Maker (MM) who is most central to the price action of a specific security across tradable exchanges. Market Makers have a lot of influence over securities prices, since they effectively control the flow of capital. And, the ax has the most control since it drives most of the price action on a given day.
Important Note: The “Ax” may change over time if the traders behind the movements switch Market Makers to throw off those analyzing their moves.
Tricks and Deception
Although watching the level 2 can tell you a lot about what is happening, there is also a lot of deception. Here are a few of the most common tricks played by market makers:
- Market makers can hide their order sizes by placing small orders and updating them whenever they get a fill. They do this in order to unload or pick up a large order without tipping off other traders and/or scaring them away. Usually average investors are not willing (or able) or will even attempt to push through an above average large block share resistance (wall). But if a persistent (and consistent) smaller or series of small share resistance is there, many traders may still think it is a beatable barrier and try to “take it out” (possible - but not advisable).
- Market makers also occasionally try to deceive other traders using their order sizes and timing. For example, Any MM may place a large offer to get short sellers on board, only to pull the order and place a large bid. This will force the short sellers to cover as existing shareholders and/ or newly arriving traders react to the large bid.
- Market makers can also hide their actions by trading through ECNs. Remember, ECNs can be used by anyone, so it is often difficult to tell whether large ECN orders are retail or institutional.
Level 2 can give you unique insight into a stock's price action, but there are also a lot of things that market makers can do to disguise their true intentions and actions. Therefore, the average trader cannot rely on level 2 alone. Rather, they should use it in addition to, not instead of, other forms of analysis AND OF COURSE THESE EXPERT TRADING STRATEGIES when determining whether to buy or sell a stock.
[RULE 17] Predictive Intent – Your Crystal Ball:
First; Remember “RULE 15” about “playing the odds” – “odds” meaning the likelihood.
It’s real simple – If I tell you that I am going to run ten miles, but I cannot or do not run even ten feet, then what are the “odds” I’m going to run those ten miles?
If a company publicly releases a list of 4 things they are going to do – but for whatever reason, they don’t even do the first thing – then again, what are the “odds” of them doing the other three?
If a company says it’s going to do something easy and that it’s also going to do something hard – and for whatever reason it cannot or does not do the “easy” thing – then what are the “odds” it can or will do the “hard” thing?
THE FLIP-SIDE OF THE COIN;
Again, it’s real simple – If I tell you that I am going to run ten feet after I just got done running ten miles, then what are the “odds” I can or will run those ten feet?
If a company gives a list of 4 things they are going to do – and they do the first two things, then what are the “odds” of them doing the third or fourth thing on that list?
If a company says it’s going to do something easy and it’s going to do something hard – and it does the “hard” thing – then what are the “odds” it can or will do the “easy” thing?
Public companies will often make “Forward Looking Projections” in their public statements, news releases, etc. And let’s say those “Forward Looking Projections” involve millions of dollars - then for some reason that same company cannot even complete or keep current their Corporate filings because they do not have the few hundred dollars to pay the accountant – then what are the “odds” they are going to (or even can at all) complete, or even start that multi-million dollar project? And yet every day investors buy stock in companies that have failed to accomplish smaller or simpler objectives in the past, yet made a Forward Looking Statement to investors they are going to start and complete something harder, bigger or more expensive. Gee, what are the odds?
This type of identifying your own “Predictive Intent” (see RULE 15) means, when faced with an “uncertain” decision making situation, (you hear hoof beats) think the most likely answer; Horses. Not an unlikely or much less likely answer - like Zebras. Unless you happen to live in an area that has a lot more Zebras than Horses - then simply use another example.
You can usually “predict” what a company can and/or will do versus what it states it “intends” to do by simply calculating what they can do now or just as importantly what they have or have not done in the past. Therefore, if you tell me that you “intend” to go to the moon, but cannot even get on your own roof, then I “predict” your “intent” is to purchase a ladder instead of a space suit.
[RULE 18] Understand the Difference Between Cost, Price and Value:
Because rarely are any of them the same. If you buy a stock at a dollar per share that is its “price”. If that stock then runs up to ten dollars per share that is its “value”. If that stock drops to a penny per share that is its “cost”. See the difference? The problem is that each has a nasty habit of showing up disguised as one of the others – and to make matters worse; they often change “disguises”. There are two ways to help avoid being fooled by a “disguised” stock. The first is to know your exit price (sell) before you enter (buy). The other is to have a pre-established “loss limit”. Example; let’s say that “loss limit” is ten percent. Meaning, if the “price” you pay for a stock drops “ten percent” below your initial and/or average buy price - you sell it. Yes, this will mean you may incur losses sometimes because stocks have a nasty habit of dropping sometimes (even by more than 10%) before they run up. But with this method your losses will never exceed ten percent and there are plenty of stocks out there (maybe even some in your portfolio) that most shareholders would gladly sell for 90 cents on the dollar…if they could go back in time somehow when the share price was much higher. But what if your pre-determined sell price ends up being a lot less than the stock eventually ends up running to? See RULE 3 above; “Unrealized gains are not losses”. Every sell in the green is a good one and never losing more than ten percent on a stock that ends up tanking isn’t so bad either.
[RULE 19] When Buyers Stop Buying – Sellers Start Selling:
Using a very specific example for a general rule of thumb, we’ll use this rule along with “RULE 13”; “Buy on Rumor – Sell on News”. Especially when comes to small cap stocks there is always somebody, or a few somebody’s that know when news will be released and possibly, if not probably, what the news will be, since with smaller companies it usually takes several individuals, and often times a few large shareholders/insiders, to help make something dramatic happen with the company/stock. Unfortunately for average investors when that occurs, it may consist of enough shares traded to have an impact on the stock sufficiently to affect what the stock would normally have done organically on its own without the involvement of those few larger sellers and/or buyers. When buying on rumor (or most times actual knowledge) they will often calculate what they hope the positive effect the news will have on the stock’s share price. If you check the trade logs on many small cap stocks prior to a run up you will usually see a significant and noticeable uptick in the volume 3 to 7 trading days prior to the news being released – then on the day of, or day after (depending upon how strong the stock reacts the first few hours/days after the news is released) you will notice approximately the same amount of selling volume that you saw buying volume the prior 3 to 7 days. Sometimes you can almost calculate it down to the exact amount of shares traded in and out. The reason is because the prior 3 to 7 days the front-loading occurred was specifically to play the “spike” that was expected to occur on the day of, or the day or two after the news was released depending upon the depth and length of the effect the news had (if any) on the share price. Most “Buy on Rumor – Sell on News” stock players are looking for at least a 20% gain and they know their best chance of realizing that gain is to sell into the natural buying (and increased share price) the news is expected to create. Therefore, as long as the “spike” keeps spiking and the share price keeps moving up (buyers still buying) those soon-to-be sellers may not be selling…just yet. But as soon as they see any amount of significant selling and/or large blocks of shares for sale stacking up on the ask (that aren’t theirs) they’ll soon realize it’s time to “get while the getting is good” and sell into the buying that ideally is still occurring from unsuspecting average investors. This is just one very specific example to give you a general idea of how and why this type of trading activity “may” be occurring with some of the stocks you trade – however, it still applies to most stocks regardless of the particular circumstances for any single day, week or event. Every trader knows what effect on the share value more selling than buying usually produces – add to that, when the “Buyers Stop Buying” – the sellers usually start selling – or at least enough of them adversely affect the share price (downward). The only question is what should you do when the buyers stop buying, the sellers start selling and the share price starts dropping? Your account balance and calculator should answer that question for you.
[RULE 20] Lend Me Your Ear:
If you have been trading stocks for a while, especially small cap stocks, and have traded a fair amount of them, think back and ask yourself; how did you first learn about the majority of stocks you invested in? If you’re like the average penny stock investor about 80% of you answered, from another investor or shareholder that knew about the company/stock and told you about it. 80% of small cap stock investors report the majority of stocks they’ve traded over the years they first learned about by word of mouth. One of the best ways you can help yourself is by helping other investors learn more about the “worthy of consideration” companies and stocks you are invested in. The more investors that know about a company/stock and ideally have a positive view of it, the more of those investors will eventually become shareholders in the stock. Mathematically and statistically speaking, barring any major negative aspect regarding the company/stock, the more shareholders a company has buying and holding the stock, and suggesting to other investors they know to consider doing the same, the more the share value will increase to and hold at higher levels. It’s all a numbers game. If you want to help your stocks (and yourself) then consider finding places and venues where other investors congregate and then get to work meeting and greeting them. Once you establish “legitimate” likeability and credibility with those fellow investors the more influence you’ll have when sharing information about certain investment idea. One “socially active” shareholder can attract ten or more other shareholders to a stock – ten or more shareholders doing the same can attract hundreds of additional shareholders – and so on. Again, it’s a “numbers game” and the larger the number of investors that learn about a particular stock means the larger number of them that will eventually become shareholders in the stock - which usually exhibits itself in increased interest, trading activity, support and of course share value. Shareholders can discuss companies and stocks in ways and places a company cannot do for itself…but you can – and so can everyone else you get to do the same. That is exactly why some stocks founder, while other stocks experience a significant and/or sustained increase in share value. So, just like Frank Sinatra sang, “Start Spreading the News”.
READ PART ONE: INTRODUCTION - Getting Ready to Get Ready - Stop Banging Your Head Against the Wall - Learning and Trading as a T.E.A.M.; Together Each Achieves More - The Financial Benefits of Trading Penny Stocks - Going Where the Money is
READ PART TWO: Trading Like the Big Traders by Trading With the Big Traders – Trading and Conducting "Proper" Due Diligence as a Group – Selling Too Soon? - Minimizing Risk/Loss – Tools of the “Trade” – Paper Trading
READ PART THREE: The Decision Process – Good News Versus Bad News - Obtaining Accurate Data – Properly Identifying Buy and/or Sell Signals – Strategies for Identifying the Right Stock at the Right Time - Your "Top Five" Reasons Check-List - Trading Your Passion - The Importance of Diversification - Effectively Dealing with Delays - Activity Creates Productivity - Keeping it Simple - Trading by the Numbers
READ PART FOUR: “The Green Baron’s Wall Street Fighting Rules” – 20 Proven and Effective Strategies for Maximizing Profits and Minimizing Risk When Trading Penny Stocks – A Must Read for Every Investor!
READ PART FIVE: Common Investing Terms and Definitions
READ PART SIX: CONCLUSION