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Scratching The Trader's Itch, Or How I Swing Trade Penny Stocks

Dec. 29, 2020 9:27 PM ET4 Comments
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  • As an active trader, it can get boring when good stocks become too expensive and I'm sitting out of the action.
  • One alternative is to swing trade one type of Over-the-counter stock known as "pink sheet" or "penny" stocks.
  • I provide some guidelines and examples for how I swing trade penny stocks.

I admit that I like trading, so when I find that stocks are too expensive, it can get a bit boring just watching the markets.  At times like that, I do some research and certainly do other things, but at some point I'm often drawn back to the action.

One alternative to finding a "keeper" trade is to swing trade "penny" stocks.  These are technically stocks that trade less than $5, but I look to the other, far end of the price scale.  Many trading platforms, including the TD Ameritrade 'thinkorswim' platform that I use, only allow trades with prices to 4 decimal places.  So the lowest price trade that I can make is $0.0001 per share.

I'll delve into some details, but I first recommend that readers skim this excellent Investopedia overview of "pink sheet" stocks (a.k.a "penny" stocks), so named because the trades used to be printed on pink paper:

A Review of Pink Sheet Stocks and How Investors Can Trade Them

Why Trade Penny Stocks?

One thing to realize is that trading penny stocks occurs on the Over-the-Counter" platforms (OTC), but that there are other non-penny stocks that also trade OTC.  So an OTC stock does not necessarily mean that the stock is somehow junk or not a serious company.  As the overview above explains, some large, well-known companies such as Bayer and Nestle trade OTC.

For the rest of this blog, I'm referring to the true penny stocks that also trade on the OTC network, meaning not on the NYSE, NASDAQ, or other major exchanges.

The best reason to trade penny stocks, the ones that I will qualify, is that it is often possible to realize a significant percentage profit within a fairly short period of time.  Trading the type of penny stocks that I do can result in a successful trade in only a day or few.  You might even call this as close to day trading as you can get except for the automatic closing of the position at the end of the day that it is opened.

From experience trading about a dozen of these in the past two years, I've seen gains from as low as 10% to as high as 259%.  That sounds a bit like trading options.  But I'll focus here on a specific type of penny stock trade that has a standing target gain of 100%, minus the commission and fees.  Even with zero commission trading today, on-line brokers such as TD Ameritrade still charge a commission ($4.50 in and out) and are required to charge regulatory fees ($5.96 on the sale for my recent trades) for penny stocks.  So for my approach here, that reduces the profit some, but it is still a handsome return for the effort.

There is often a sweet spot that each trader has to determine for the total cost of the trade and, therefore, the number of shares.  So that's where trading volume comes in.  If the regulatory fee were the same (say $5.96) for a trade, the commissions and fee reduce the net profit more as the total cost of the trade decreases.  So for a $100 trade, the final profit would be 81.4%, for a $200 trade it would be 90.5%, and for a $300 trade it would be 93.6%.  There may be a point where larger trades inhibit liquidity, so what I recommend is to choose a middle range for these "doubling" trades, such as a cost between $300 and $500 each, which means trades of 3- to 5-million shares each.  In lieu of getting stuck with an out-of-range sized trade, I recommend to just repeat the trade.

What to Focus On

There are four characteristics of penny stock trades that I look for:

  1. I've found that it is fairly easy to guarantee that near-double profit by focusing on trades for which the stock price ranges from $0.0001 to $0.0002 per share.  As long at the price increases by the lowest possible increment, that doubling is literally by default.   From looking at price charts, I can see that other traders apparently do not have the limitation of only 4 digits, as trades are shown at virtually 0.0000 and at .00015 or other half penny increments at 5 digits. But so far, the .0001 to .0002 trades seem to work very well when trading stocks that meet all of my criteria. That is, even with some traders able to place half-penny trades, I find that the majority of these trades are in full penny increments.
  2. Choose penny stocks with the highest market caps possible, all other characteristics being satisfied.  This just assures that the stock company is likely to be more of a going concern and for some reason is not in a multi-year hibernation.
  3. Choose stocks that have more consistent price patterns especially those with a strong current trend of frequent trading between the two price points.
  4. Choose stocks with high enough volumes that the trading is robust.  Illiquidity is a killer for trading penny stocks.  You can sit in a trade for months if the price action is not active.

Finding these candidate trades is actually not difficult.  Using my stock screener, I simply search for stocks ranging in price from $0.0001 to $0.0002 or even a few pennies more, and then sort by market cap (on the "basic" screen panel with TD Ameritrade).  I then jot down the list of stocks and scan the price charts quickly on my charting platform.  It goes very quickly because I focus on clear price patterns - frequent swings between my target price points and good volume.

So here are two chart examples, both for the past 9 months, the first a winner and the second a non-starter:

The top chart has more frequent trading, and in December traded consistently between $0.0001 and $0.0002.  Notice, too, that after a few days of moving in the higher price range, the price popped a few times to $0.0003.  It's these heavily-traded, frequent price ranges that makes for a higher-probability trade set-up.

Trade Example

The penny stock trade that I made today was for HCMC.  I often don't really even look at what these companies are as my intention is to get in and out as quickly as possible.  This one, Healthier Choices Mgmt. Corp., actually owns a natural foods grocery store and a number of vaping stores in Florida.

I found this stock doing my screen and scan as outlined above.  The price chart (daily on left, 10-minute on right) was nothing short of beautiful:

For most of the past nine months, the stock traded between $0.0000 and $0.0001, until December, when it doubled and traded consistently between $0.0001 and $0.0002.  I set a limit buy order for 3 million shares (only $300) and the trade triggered fairly quickly.  You MUST use limit orders when price is swinging between the two price points.  I then IMMEDIATELY set a sell limit order for $0.0002.  Trading was fairly brisk, as the Times & Sales panel below for part of the day shows:

It was the proverbial "set it and forget it" trade.  In only 3 hours, the trade doubled and, after expenses, I pocketed an easy $285.04 (+93.6%) profit.

For those who have been reading since my portfolio days, you know that I don't blow smoke, so here's my trade log:

In my Roth IRA where I can make trades anytime without concern about taxes, tracking, etc., I could do this all day when the set-ups are there. Rinse and repeat.

There are more of these candidates out there than you might think.  So be selective and look for the best probable trades:  high volume, consistent trading between the price points, and use limit orders.  As always, never trade money you can't afford to lose, and keep penny stock trades to a very, very  small portion of the portfolio.

A final caution that should not be a huge concern for most readers, but is worth noting: don't run afoul of the "pattern trader" rules if you are using margin.  Details here:  Pattern Day Trader Definition 

Perhaps, if like me you get a "trader's itch," you can find a perfect nearly-double penny stock trade!  That should make you feel much better.

If you enjoyed this article, let me know and share it with someone else (reminder, readers of blogs must follow my Green Dot Portfolio).

Thanks, and best to your investing/trading,


Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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