Penny Stock Trading: Behind The Scenes

Covid-19 is changing our world and lives in a lot of ways. One way that might not be apparent to everyone is the incredible influx of amateur stock traders. Flush with time but with limited ways to make money has led many people and their limited knowledge and experience to the stock market.

If you follow the right people on Twitter you’ll see that there are a LOT of novices. You can spot them by the type of questions they ask. Questions like, but not limited to, “is this a good time to buy X stock?”, “What is a form S-3?”, and one of peoples favorites “when should I sell?”.

Confession time, I am one of the people using this time to learn day trading. Granted, I have been actively purchasing and selling stocks for over 10 years and while I have a decent understanding of financial statements, e-trade tools, and day trade patterns/indicators, I’m still a novice. I’m guilty of asking my own dumb questions, making dumb mistakes, and showing my ignorance in spectacular fashion.

On this journey I’ve done a lot of reading and watched a lot of videos. Something that has stuck with me is that stocks move on emotion. It makes sense if you think about it. All of those fancy indicators are basically just ways to measure the intensity of the emotions that are moving a stock’s price. Past indicators tell us what happened, future indicators predict what will happen, and we hope that putting them together will uncover patterns we can use to increase our odds of winning.

Here’s where it gets interesting: What creates the emotion?

Why do we see multiple stocks everyday day gain 100’s of percentage points and others drop by similar percentages? The easy answer, and what most people think, is that they move based on financial metrics. A company beats earnings and the price goes up. Their new product has a recall and the price goes down.

Sometimes its an emotional response, like when a CEO turns out to be a crook or a liar. The company financials don’t change but the markets perception of the company changes.

You don’t need to study the market in order to see that the market is wildly irrational at times. Some days Wall Street is on Mars and Main Street is on the Moon and we think there is no way that the two could every intersect. Other days they seem to be intimately connected like a dog and his tail. Which street is the tail and which is the dog is anybody’s guess.

Here’s where it gets scary: Who creates the emotion?

Im not talking about the CEO who gets caught, I’m talking about the people who can move the market simply by speaking. You can count CEO’s and other high level company people in this category but it doesn’t have to be a scandal, sometimes they just need to show their face on TV. Other times certain analyst can gain enough clout to move a stocks price. They’ll pass a judgment based on their research and depending on the outcome, the stock will move accordingly. You can also find people on CNBC and other media outlets that have a loyal enough following to make things move. But, in this article, I’m not talking about Fortune 500 companies, huge blue chip names, powerful CEO’s, or Celebrities. I’m talking about Penny Stocks and asking who makes these stocks move?

You’ll notice that I haven’t used names and I’m not going to. This isn’t about calling people out. I’m not on a crusade to bring people down. I’m on a crusade to tell people things that I didn’t find out when I was researching trading. The truth about trading gets buried by the Google algorithm that gives precedent to guys and gals who pay real big money to make sure their websites are at the top of the page.

You can find these people on YouTube also but the best place to see them in action for free is to follow them on Twitter. Their systems typically include stocks that meet these components:

  • Low Float
  • Price ranges anywhere from $0.01 to $5 with the random $10+
  • Incredible setups…. they’ll tell you about these for a couple thousand bucks.

In some cases these guys seemingly act alone but know that they have a team of people, hype men if you will. In other cases it is clearly a team effort. These individuals and teams don’t always require you to pay anything to trade with them but they almost always get kick backs from selling someone else’s product.

Why low floats? Well, because if there are only 5 million shares available and the team can hype a stock enough they can easily get it on the radar. 50 people buying 1000 shares is a full 1% ownership.

Why stocks with low prices? Well, 1000 shares at $1 is only $1000 bucks, easily palatable for most small time traders. If they are pumping a $0.50 stock to 50 people with $1000 to spend they can make a full 2% move on that stock. It doesn’t sound like much but when you’re talking about 100,000 shares moving in 15 minutes of a stock that might not move 100,000 shares in a typical day, its a big move. Right now, it’s 2:23AM EST and there are over 3000 people online between a couple of the chat rooms I follow. There are over 50,000 people subscribed to them. You can make your own guesses about how many people are online at 7am and/or 9:30 AM but think about the math above. What if the team had 1000 people pumping a stock? What if it were 10,000? Could they get into a stock before they pump it and out before the stock falls again? How much money could be made if you could predict these moves?

Again, I am NOT about to start bashing the guys that run these forums. In fact, I have an appreciation for what they do. They are all (most) really smart. They understand the market and how to research companies. What they do isn’t illegal (I don’t think) and you know what they say about a sucker and his money so I say, more power to them.

However, the playing field isn’t exactly level. It never will be so don’t get your hopes up. But here’s what you can do. You can understand the game. These guys will always tell you to do “due diligence” or “DD”. Its great advice. You should understand the stocks you’re buying. You should also understand who else is buying them. You should understand why they are telling you to buy them.

Again, a lot of these guys are good guys. They have found a way to make great money. As much shit as they will talk about each other, I won’t talk shit about any of them… except maybe one. They are making the market. They are creating the opportunity. Its up to you to do your own DD.

A couple tips:

  1. Figure out what types of things make you feel comfortable with a stock – only invest in those stocks
  2. If you read that a stock is about to blow and its up 25% already – Be careful
  3. Set Stop-Losses. If you don’t know what a stop-loss is DO NOT trade until you do
  4. Don’t try to hold a stock until the top of its price range
  5. Figure out what your target gain is and then figure out if the stocks movement will allow you to meet your target
  6. Follow every trading group you can. Follow the good guys close and the less ethical ones closer
  7. Learn how to spot the unethical guys. They post things like “this thing has just gotten started” even though the stock just ran 40% and dropped 20% with no signs of stopping
  8. Start small! You’re gonna mess up. You’re going to think you know enough until you find out that you don’t.
  9. Concentrate on winning consistently. Go for small wins at first. Win small, lose smaller.
  10. Don’t trade with $100 if all you have is $100.

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