Penny Stocks About to Explode

Traders with a higher tolerance for risk often look to the penny stock trading arena for aggressive returns, and the “Holy Grail” of this particular lane of trading is to locate penny stocks that are about to explode. Believe me when I say, there’s enough hype and pump-and-dump mania out there in the form of newsletters, junk mail, fax blasts, and other paid promotions of random microcap stocks to last a lifetime. Rest assured, if you’re on some type of mailing list that targets investors looking for the next penny stock that will deliver triple-digit returns, you’re going to be amazed at how the hype machine kicks into full gear with some of the stocks that are promoted. You may get a sweet looking glossy 10-page report on how this energy stock, that biotech stock, or this government defense contract stock is going to be the next (fill in your stock with humble beginnings and meteoric rise here) within the next 6 months, or some other time frame that doesn’t seem too far away, so that way you will feel more of an urgency to go ahead and plunk your money down for a nice block of shares. Truth be told, most of these types of reports are full of what is famously called in legalese the all-too-familiar “forward looking statements”, and if you read the fine print in almost all of these reports, you’ll see, in one way or another, how they have completely legally disqualified themselves from any liability whatsoever for what they’re claiming about the stock in question. Most of the time, these publishers are paid thousands of dollars (or thousands of shares of the stock at a wholesale price) to write and promote these reports, and of course, at the precise time that most investors are clamoring to get in, these people are the ones that are happily handing over their shares and exiting their positions as the markup hype kicks into full gear. The “Greater Fool Theory” is hard at work every day in this world.

So on to the whole premise of penny stocks about to explode. How can you tell when this is going to happen? As “elementary school” as it may seem, I have a very simple way to determine whether a penny stock is going to rise or not, and it comes by way of reading and interpreting the price action of the stock, which can only be ascertained by studying the price charts of the stock in question. The charts will tell you everything—again I say, the charts will tell you everything you need to know. Truth be told, you really don’t even need to know what the company does to know whether or not the price is about to explode, IF you pay attention to what the charts are telling you. There’s an excellent book by a legendary stock trader named Ted Warren called “How to Make the Stock Market Make Money for You”. If you have not yet read this gem, I implore you to drop just about everything you’re doing (short of breathing) and get this book. The book is all about how to recognize the different cycles of a stock’s price, based on what the insiders (a.k.a. the “strong hands”) are doing. You’ll see as Mr. Warren describes the Base, Markup, and Distribution phases, and then the subsequent deflation of the stock’s price (which happens to be the time where most inexperienced traders finally realize that they bought at the top). I have used Mr. Warren’s methods over and over again, and let me tell you, they are as reliable as the day is long. Of course, trading is such a psychological activity that there’s no way anyone can guarantee that everyone will profit from ANY trading system, because trust me, even if the system was absolutely perfect, human beings have an uncanny way of sabotaging themselves right out of profits if they’re too emotional with their trading—and believe me, I’m speaking from experience. What I do like about the book is that it gives you a very reliable road map to gauge what to look for in stocks, and although he covers stocks that are higher in price-per-share, the same techniques can be applied to penny stocks as well. So rather than “giving you a fish” by just spouting off three-letter or four-letter stock symbols, I think it’s more important that I “teach you how to fish” by recommending Mr. Warren’s book—if you’re a serious trader, you won’t regret the recommendation.