Penny Stocks: A Day Trading Guide for Beginners

Learning how to day trade penny stocks has gained tremendous popularity over the last few years. For a number of good reasons.

1. Allows traders to trade with less capital.
2. Penny stocks are known for moving over 100% in a single day!

Whether you’re a short biased or long biased trader, there’s clearly a lot of money to be made trading penny stocks. Traders can easily double their account in a single day, trading the right side of a massive move. But, they can also lose that by not knowing how to trade them properly.

For starters, what are penny stocks?

According to the SEC (Securities Exchange Commission), the penny stock definition is any stock trading under $5.00 per share.

Penny stocks usually have a small market cap, meaning the number of outstanding shares available are normally under 5 million, sometimes as low as 300,000. It is calculated by multiplying a company’s shares outstanding by the current market price of one share.

That’s the reason why penny stocks are known for making big moves, because someone with deep pockets can easily buy the whole float.

How I got started day trading penny stocks

I was first introduced to penny stocks after seeing an online ad for a day trader claiming to make over $1,000,000 day trading penny stocks. Although I was skeptical and it sounded too good to be true, it sparked my interest.

This led me to purchase a few online courses on day trading. I watched them all and thought, wow this looks easier than I thought. I immediately opened my first brokerage account with Interactive Brokers.

I had also signed up to a chat room, where the “guru” would call out his trades live, and thought, if I just mirror his trades, I can make the same amount of money as him, if not more. Wow this is great!

I started off by practicing buying and selling paper money with my DAS subscription. I also set up my hotkeys so I can enter and exit trades with a click of a button. After about a month of practicing with paper money, and seeing huge profits, I was finally ready to place my first real trade.

Day 1 is here, I’m in the chat room, “guru” is going over pre-market gappers at around 9:20am. He has his eye on this one stock. 9:30am hits and the stock market opens. The stock he was watching starts moving up and he calls out that he’s long. The stock was trading around $4 before the open and immediately spikes to $5. I enter my first long position of 1000 shares with an average of $5.03. The emotions I felt was nothing compared to how I felt using paper money. I was very nervous that I had $5000 of my hard earned money on the line.

The stock ends up hitting $5.50, I was up $500 in a matter of seconds. “Guru” was long with 10,000 shares with an average of $4.50 and sells his position at $5.50 locking in $10,000. Within the blink of an eye, the stock dropped down to $4, and I was now down $1000. I ended up selling it for a $1000 loss. I was devastated.

After a few more weeks of similar scenarios, it finally clicked. The “guru” was using his chat room to pump the stocks to his advantage. Because he would always be the first in the trade, and by the time everyone else entered, the stock would have already made a big move up, he would end up selling his shares to everyone else entering the trade later than him! And that my friends, is how chat rooms work, and why you should avoid them at all costs.

My Turning Point

After signing up to many different services, I found they all had a similar theme. They were mostly based on guesswork and feel. There was no defined strategy.

That was until I found the mentor I had been searching for. A mentor that had a proven system backed by thousands of backtested charts. He put in countless hours of work backtesting the same scenario over and over again and came up with a black and white approach. If this happens, then this.

If your mentor can’t define exactly why he’s in a trade, with a valid stop and target, you need to ask yourself why are you spending money on someone who’s basically guessing.

How to find penny stocks to trade

Every morning, I go over my stock scanner, that’s set to a very specific filter to only display the highest probable stocks in play each day. The highest probable data comes from backtesting thousands of the same scenario chart patterns over and over again.

First step is to see which stock is gapping up at least 50% and has at least $1 of range. I normally trade big gaps to the short side, as they are pretty overextended. But, the key to entering a short position on stocks that are gapping up, is knowing when the trend ends. This strategy is taught thoroughly in the full time day trader course.

Trying to short the front side of the move of a low float stock that’s gapping up can be very dangerous. That’s why it’s critical to know exactly when the trend ends.

Day trading chart patterns

Seeing the same chart pattern play out over and over again is what will give you confidence and conviction. Take a look at some big gap context chart patterns below. Would you believe me if I told you I can tell you exactly where the stock is going to reverse? It’s the same process over and over again, which I disclose in the full time day trader course.

day trading chart pattern
Day Trading Chart Pattern
Stock chart
GEVO stock chart pattern

Final Thoughts

Day trading can be very rewarding, if you have a well defined strategy. It can also be your worst nightmare if you don’t know what you are doing. Getting proper trading education is crucial if you want to start a career in day trading. I hope this guide has helped you, if you have any questions feel free to contact me. Best of luck on your trading journey! 

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