Sunday, April 10, 2011

Penny Stocks are a way to Scale up your Trading Method

I have been trying to find a way to expand my trading process. I have blogged in the past about trying alternate paths to reach this goal.

I have always approached my trading such that if I saved and acquired a large enough starting capital base that I could trade full-time. I would have more than the minimum in a day-trading account and everything would be great. But life always seems to intervene. Kids, college tuition, weddings. Yikes.

It also seems like the market has changed in the last few years. Of course, the last 3 years have been tough. The stocks I buy are in the price range from 10.00 to 100.00 dollars.  I take 1/3 of my total pot in each position. I quickly run out of attention or money if I try to increase anything.

Options would be a way to do it. I started to experiment with options, so that I could increase my positions by 100 fold; However I hate  the risk of losing a chunk of money if the options expire. I detest losing money.

Last night, I was in a stock chatroom and I had an epiphany.  On a penny stock I could buy a stock in the range of 1.00 to 10.00 and scale my trading process by ten-fold. If I went further and started buying stocks in the   .10 to 1.00 scale I would match an options leverage. I wonder if there are options available on penny stocks? So much to little time. Check out the pink sheets.

The drawback would be that more homework would be required to approach the added risk for these smaller companies. More vigilance would be required to watch for scams and fraud. I found a good website  that talks about companies that are "too good to be true".

That sounds basic, right? I'm increasing my risk to get a larger payout.  The thing about investing is that the complex truth or new moments of divine revelation always diverge back to the basic ideas.

Has anybody else tried this?

[edit a month later]
Well, I'm at a point in my blog life here where my ethics/values have to come into play. Should I just delete this post and act like it never happened? No, the intent of this blog was to learn all I could and post my trivial thoughts as I went along the trail. Hopefully they help you. 

Penny stocks are all fundamentally bad. They all suck. But, you can still make money with stocks that are unsound. Your just not going to make money if you treat them as value or position trade stocks. My swing trading methodology is not going to work with penny stocks. Know what your getting into. Day trade these things and never hold on to them through the weekend.


  1. The past three years have drastically altered the landscape of the Penny Stock, generally considered to be those companies with share price of $5 or less, and/or market cap somewhere south of $100M. Using the first, Citigroup, GM, Ford, AIG, National City Corp, and a whole host of other companies suddenly changed from blue chips to penny stocks.

    But, with the return to rough normalcy, penny stocks once again are just penny stocks. While the returns can be more than just Peter Lynch's 10-bagger, the penny stock that can rise to the occasion is few and far between. You either need extraordinary luck... or need to (a) really know the company's story, (b) really believe in the company enough to buy and hold, and (c) be observant enough to realize when buy and hold just isn't good enough. I bought Woodstock Financial (WSFL.PK) 7 years ago, because they seemed to have a sound balance sheet, even if the company was a wee bit off the beaten path. Well, that obscurity led to very low volume, the bane of any penny stock investor. While Woodstock's story has improved very recently, the volume has only improved a bit... not enough to warrant dangling my shares out for buying fish to bite on.

    So, know the story and know the market. If the company is prone to low trading volumes, be prepared to learn what true buy-and-holding really means. You'll get a new appreciation for Warren Buffett's holding of Washington Post and Coca-Cola, as well as Graham's Intelligent Investor book.


  2. To refrain from intercepting an enemy whose
    banners are in perfect order, to refrain from attacking
    an army drawn up in calm and confident array:--this
    is the art of studying circumstances.
    --Sun Tzu, book 7, para 32.

    The general who thoroughly understands the advantages
    that accompany variation of tactics knows how to handle
    his troops.
    -- ST, book 8, para 4

    So, the student of war who is unversed in the art
    of war of varying his plans, even though he be acquainted
    with the Five Advantages, will fail to make the best use
    of his men.

    Hence in the wise leader's plans, considerations of
    advantage and of disadvantage will be blended together.
    -- ST, book 8, para 6, 7

    The art of war teaches us to rely not on the
    likelihood of the enemy's not coming, but on our own readiness
    to receive him; not on the chance of his not attacking,
    but rather on the fact that we have made our position unassailable.
    -- ST, book 8, para 11
    The Liibrivox reading of Sun Tzu is available at or via iTunes