If you are going to trade stocks, trade what you know. That means if you have specific knowledge regarding a specific Stock sector stick with that. If you are really good at technical analysis algorithms use those. If you want to make a killing in the market pick a cheap stock with promise and sell when it goes up a hundred fold. All of this sounds good but specifically how can you make money trading penny stocks? There are three viable approaches. Knowing what no one else knows about a stock, exceptional technical trading skills and buying a large number of cheap stocks are three ways to go.
Pay Attention to Stocks that Analysts Don’t Know About
Years ago a friend of this writer worked for DaMark. This company sold high end electronics via a catalog and mostly took orders by phone. They did well until one of the founding partners took his money and left. The other did not do so well and the stock tanked. While no analysts were watching the remaining partner got some solid advice and revamped his business. The friend in question was a trainer for new employees who needed computer skills to process orders and she was exceptionally busy getting ready for the holidays. The company had a banner 4th quarter and the stock rose five fold. Anyone with knowledge of the prospective turn around made money on this penny stock while the Wall Street analysts were sleeping.
History Repeats Itself
Back in the days of the samurai in Japan rice traders recognized that certain price patterns repeated themselves. If the trader recognized the first part of the pattern he could buy or sell to make a profit as the remainder of the pattern unfolded. The still-used Japanese Candlestick technical analysis signals evolved from this era and are still used today in trading. Whether you use this time honored approach or a newer means of statistical analysis, day traders follow stocks or indexes and make steady profits on the normal volatility of the markets. Purely technical traders believe that the market quickly internalizes all new info so that analyzing fundamentals is of little use but quick and accurate response to trading signals is profitable.
The Random Walk Down Wall Street
As the story goes, years ago a bunch of business writers at The Wall Street Journal hung the NYSE stock page on a cork board. Then they threw darts at it to pick stocks. The writers kept track of their random picks and found out that over time the randomly chosen stocks did better than the S&P 500 and much better than many managed funds. The book A Random Walk Down Wall Street was the eventual product of this experiment. The rationale is that the stock market prices stocks are accurate according to available information. Thus there is no room for trying to outguess the market. A subsequent publication, The Random Walk Revisited, noted that investors are willing to accept a lower rate of return for secure blue chip stocks and want a higher rate of return for more risky penny stocks. Thus the average rate of return on penny stocks is higher that blue chips over time. The problem when picking one penny stock is that it might fail which is why the market has priced it where it is. The writers said that if you pick 40 penny stocks that is enough to average out the losers whereas you only need 10 blue chips. Over time you can make money with penny stocks because they are priced cheap and have better growth prospects as a group than blue chips.
How Can You Make Money Trading Penny Stocks? PPT
