Cheap Penny Stocks - How To Pick The Right Ones

Many first-time traders will be so naïve as to fall into the illusion that cheap penny stocks are the goldmine of the stock market. But this is not so. You may have heard of penny stock companies that pump up their shares issuances as the best thing since sliced bread was invented. When you have purchased the penny shares in expectations of a profit, the company then dumps the stocks while you are left in the lurch of huge losses - the classic pump and dump scam.

Then again, why become the victim of these microcap shares schemes when you have many ways to actually make a tidy profit from these non-marketable securities? The following strategies have been proven effective by no less than seasoned traders who successfully dabble in both high-risk but cheap penny stocks and low-risk albeit expensive blue-chip stocks.

Your first step in finding the cheap nano stocks with the highest profit potential is to look for a breakout pattern. The daily, weekly and monthly charts should be analyzed for changes that indicate an increased investor interest for the microcap shares. The general rule is that if the other reliable traders are seeing the shares positively, then there must be merit to it.

But there are always exceptions to the rule like the pump and dump scheme. You must always perform fundamental and technical analyses on the penny shares and their issuing companies before making any trading moves. This is all too true with cheap penny stocks issued by shadowy companies.

Going back to the breakout patterns, the increase in the volume of shares traded for a specific counter can be used to gauge investor interest. If more traders and investors are putting their money on the nano shares, then it is worth a second look. You never know the riches that can be found in the most unlikely places.

But always remember to do your research. The investors may be the same individuals that run the issuing company and, thus, will be the one who will profit the most from more legitimate investors coming in. It is also easy to make it appear like the number of shares issued is increasing when, in reality, the company announced stock splits.

Another effective way to profit from cheap penny stocks is to use the stop loss order trading strategy. Basically, you place an order with the stockbroker with instructions to automatically sell the shares at pre-determined support levels on the charts. You will then be able to lock in your profits on time.

You want to grab the profit opportunity once a certain dollar amount or a percentage rate has been reached if and when the shares are to be sold. Once that point is reached, don't be greedy by waiting for the prices to rise even higher in the anticipation that your profits will be higher, too. With the highly-volatile nature of penny stocks, you may even lose money when the stocks plunge to new lows unexpectedly.

Indeed, trading in cheap penny stocks is not for the lazy non-learner. You must pour time and effort into researching your options before placing money on any of the penny shares issued.