Since I started buying and selling penny stocks I have had some spectacular gains and some equally spectacular losses. Today I am going through the best penny stocks that I have owned as well as the reasons for why I bought them.
About a month ago I did a post on Why I Buy Shares in Penny Stocks and at the time it got a fairly mixed bag of comments with some people saying just don’t do it, while others had very little knowledge about them. Interestingly enough, over the last few weeks it has been one of my top read pages for both searches and referrals, therefore I can only assume that people want to know more about penny stocks and how to pick them.
One thing I will note before I get into this is that I live in Australia and I buy and sell stocks on the ASX (Australian Stock Exchange). Apparently in other countries like the US, many penny stocks are not listed on a central exchange and are much more difficult to trade due to decreased liquidity. For me personally, I would only get into penny stocks if they were available on an exchange where you can get in and out at a minutes notice.
What I look for in a Penny Stock
When I enter a penny stock I look for a few main things.
- A big price increase that breaks the recent high (within the last 6months to a year)
- The price increase should preferably be on larger than normal volume (2.5 x normal volume is a good indicator)
- Plenty of liquidity in the stock so that I can enter and exit without too many dramas
That is about it. You just need to be able to see the patterns on the chart and the rest will follow.
When to Sell
Learning when to sell is far more difficult than learning when to buy. I still have issues with this when I like the fundamentals of the company 🙁
When I am trading a stock I normally set a trailing stop loss of 10-15% so that no matter what happens I will get out with a profit. If I like the company and think it is fundamentally going places, then I like to look for long term support and resistance lines to help me determine good entry and exit points. If a stock bounces off resistance then there is a fair chance that I will exit and look for a better entry point. If it breaks through resistance then I hold until the next resistance test or if it falls through support.
My History with Penny Stocks
Let’s run through a few of the best penny stocks I have been involved with in the past.
EXT – Extract Resources
Extract resources was kind to me, it was one of the few stocks that everyone was buying even when the GFC was in full swing. I traded it twice, making some serious profits along the way. What I looked for was big increases in share price that broke through previous resistance or trend lines. Then when I wanted to sell I would wait for the stock to retrace at least 10-15% from its recent high. This way I maximize my gains if the price continues to go up, but limit my losses if it continues down.
First Buy – $0.62
First Sell – $4.36
Second Buy – $6.90
Second Sell – $8.70
ZFX – Zinifex
Zinifex was another ripper which turned from a penny dreadful into a ASX200 (maybe even ASX100 for a while) company. The time was pre-GFC and almost every resource stock was going up like a rocket. I didn’t really have any trading rules that I abided by back then, so most profits I made were more luck than anything else, nevertheless it set me up for some more difficult times in the future.
First Buy – $3.81
First Sell – $7.10
Second Buy – $8.45
Second Sell – $10.98
EDE – Eden Energy
This one really is a dreadful, but it is a great one for trading (at least it was, I haven’t looked at it in ages). Often this stock would creep up right before a market sensitive announcement. So whenever you saw the volume increasing and the share price gaining 10% in a day, you knew you should get on board, because it was likely someone had some inside info. As you can see, it had some very wild trading ranges and was good for big run ups if you could get in at the right point.
First Buy – $0.055
First Sell – $0.115
Second Buy – $0.053
Second Sell – $0.089
LYC – Lynas
This stock got hammered during the GFC, but it presented some great opportunities for buyers who had the right risk appetite. I remember buying into this one and thinking it was going to shoot to the sky in the coming months. It did as expected, but I was out WAY too early to enjoy most of the gains.
Buy – $0.22
Sell – $0.40
Interestingly, this stock has come right back down to earth recently and I might look to reenter when it breaks out of it’s down trend. I expect it will likely bounce off 30 cents, or if that fails, 20 cents. Anyway, it is certainly one to watch over the coming weeks.
What Not To Do
ATI – Atlantic Resources
Despite making a huge profit on this penny dreadful what I did is still something you shouldn’t do. First off, I bought on a false breakout, rather than waiting for the trend to be confirmed. Second, I got caught up in the story of the company and held on for a long time (years) when I normally just go with what the charts tell me. Eventually the news out of this company just kept getting worse and worse and I sold out at a little over $1, when I could have sold out at over $2.
It could have been worse… If I had held on until today the price is sitting around 20cents and I would have been back where I started.
Buy – $0.21
Sell – $1.05
URA – Uran
This is what REALLY not to do! This was the first penny stock I ever got into and I thought I was a king among men and that trading the stock market was about the easiest thing you could do. It was just so simple, you buy on big volume days where the price gets pumped up, and sell when the stock comes back down. Unfortunately for me, I bought into the hype. I had 1 successful early trade where I had bought in at around 15 cents and sold out at 45 cents making a huge 300% profit!
So when it took off again I wanted to make sure I didn’t miss it. I bought in at around 55 cents and watched it climb all the way to about $1.70. This time I decided to buy more at about $1.50 thinking that it was going to go up forever! Unfortunately it didn’t and I held it all the way back down, and still hold it to this day as a reminder of how stupid I was and what not to do again in the future.
Current Penny Stocks
NEU – Neuren Pharmaceuticals
Late last year I bought some shares in a little bio tech company called Neuren. I bought it entirely based on technical chart analysis as it had just broken up on high volume and looked set for a run. Anyway, I got caught up in the story of this company and what it is doing and have ended up holding it far longer than I planned to. Even the long term technicals of this company are starting to look amazing, with some very old resistance points getting broken. I expect that in the next year we will see 20-30 cents on this stock and so I plan on keeping about 150,000 shares as long term investments, and trading the rest as the market moves.
In the very short term a move to 6.5 cents wouldn’t surprise me, but hopefully things can continue this creep upwards towards 12.5 cents for a while.
Anyway, I hope this has illustrated what I look for on the charts when buying penny stocks, and what you should and shouldn’t be doing when it comes to investing in the lower end of the market. There is some very decent gains to be made, but it does move very quickly and so you need to be decisive and fast thinking if you are going to make money.