Penny Stock Marketplace

Does the title suggest an informative post on questionable practices in the trading world, or is this just a shameless attempt to promote a penny stock blog? You make the call.

First of all, a short sale is the sale of a stock you do not own. If an investor believes the price will fall, he will “borrow” shares and immediately sell them in a short sale. If the stock price does decline, the investor buys shares back on the open market to replace the borrowed shares. Since the price is lower, the investor profits on the difference. If the price goes up, the investor loses money. Yes, you can make money when a stock declines in price. This is completely legal unless short sales are used to manipulate the price of a stock. Who would want to do something like that anyway?

Before you go out and start shorting everything in sight, remember that a stock can only fall to zero. In short selling you make money on the way down and lose money on the way up. Theoretically a stock can keep rising indefinitely. The potential for huge losses is great unless stops are put in place.

As for a ‘naked’ short sale, the seller does not borrow the securities in time to make delivery to the buyer within the standard three day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due. This known as a ‘failure to deliver’ or ‘fail’.  Simply put, the seller is given the opportunity to borrow shares that are not really available to borrow.  This is not necessarily a violation of SEC rules or federal security laws. It can be argued that naked short selling contributes to market liquidity. It may take a market maker considerable time to arrange to borrow the security, and in a fast moving market, the market maker may need to sell the security short without having arranged to borrow shares. Illiquid, thinly traded stocks such as those traded on the OTCBB are susceptible to this practice as there may be few shares available to purchase or borrow at times.

Quazimoto says live and let live. Price swings in either direction, even if caused by naked short selling, create profitable opportunities. I’ll stay neutral by not reminding Quazi that even if he held all shares of one stock today, trading of these shares, because of naked short selling, could continue days afterward.

This type of practice makes me question the legality of printing some twenty dollar bills on the Bizhub.

Take a look at Water Chef (WTER).  A six month chart reveals a stock that has climbed more than 300% in a few days followed by a  sharp 50% retracement.  Holding the current price for a few days might indicate another strong move to the upside.  Now take a look at this same stock on a five year chart.  Still feeling confident?  Probably not.  These large spikes in price are a common occurrence every ten months or so for WTER.  Each spike is followed by a continued decline in the price. Who can blame this stock for being tired after monster moves like those?  Technically speaking, keeping a perspective by checking charts of various time periods is essential to good decision making, especially if you plan on “marrying” the stock.

Quazimoto is quick to remind me that he has no plans on marrying anytime soon, but another short term spike for WTER is very possible.  Too early to be included in the watchlist but there are always exceptions to the rule.  Quazi tend to “eyeball” anything that retraces on lighter volume anyway.  His favorite numbers are still .382, .500, and .618.  More on Fibonacci numbers later.

If you want to know who has caught the attention of the Securities and Exchange Commission recently, check out the latest scams and scammers on the SEC site.  This is good reading for those who want to trade the micro caps, pennies, and pinkies. 

Quazimoto is busy at work churning and sorting, slicing and dicing through the charts, facts and figure that will determine which stocks make the coveted Quazi watchlist.  Two stocks on the current watchlist are ESMT and  HYPF.  While neither one of these has given  a strong buy signal, the new level of support that these stocks are holding qualify them as “watch worthy”.  Of course, Quazi, being as fickle as he is, will toss these two out if they flatline for too long or break support.

There are many stock screening tools available to choose from.  Some are strictly based on fundamental analysis.  Others use technical analysis.  Regardless of whether you use one or the other, it is important to remember not be so specific that good stocks get thrown out of the list.  If a stock meets all the criteria except for one or two, it is sometimes best to keep those outliers in the group. 

The recent list of possible huge gainers included five stocks with similar pattern.  Each moved up dramatically, re-traced, and then held, and are still holding, a fairly straight line for several days.  Quazimoto insisted on keeping PRCC in the list although it did not look or act like the other five but did trade in a cyclical pattern.  I initially threw it out but Quazi insisted that his “art” should not be tamper with or altered in any way.  The result, in this case, speaks for itself.    

Diversification is an investment stategy that seeks to minimize risk by spreading you portfolio among many types of investments. This can include buying a combination of international mutual funds, growth stocks, value stocks, gold, and bonds. When swing trading, diversification can take on a completely different meaning. Higher risk and reward is associated with the stock picks that have a greater chance of making large moves in either direction. The chance of success is generally lower but the payoff can be worth the risk of taking several smaller loses. A profitable portfolio is often the result of a small percentage of big winners rather than a high win/loss ratio comprised of several small gains. Magnitude trumps frequency more often than not. Keep in mind that some of the greatest hitters in baseball are high on the strikeout list.

 Market cycles require variation in strategy. Regarding magnitude and frequency seperately offers more profitable results due to the need for flexibility during these changing market conditions.

Quazimoto’s pick of PRCC was the definition of magnitude for a penny stock trading in a range.  The range between 10 and 20 cents completed yet another cycle.  The shrewed trader that trusted Quazi’s pick would have been rewarded with an 81% gain in less than four days. 

  Ask any new trader why he or she did not make a profit and you will get a wide variety of answers.  Getting an honest answer at all may take some shrew interrogation. Traders are like anyone else.  The majority don’t like to admit their mistakes.  And unless the market is in full “bull run” mode, most newbie traders will fall short of their desired goal of making a fortune by year end.  Falling short is just a nice way of saying that there is now less money in the trading account than there was at the start.  If your situation sounds similar, don’t despair.  You are not alone.

    It is interesting to discover, when honest answers are finally revealed, that trading methods differ in many respects but one common mistake transcends them all.  What is that one major trading error that if avoided could actually turn all those red numbers to green?  Before answering that question, keep in mind that many successful traders have just as many losing trades as winning trades.  That being said, not cutting your losses early when a trade goes wrong is the common thread that ties all losing traders together.  Letting your profitable trades run and cutting your losses early is a key fundamental that should be stamped on the forehead of all that enter the world of stock trading.  But of course, as with most simplicities in life, this is easier said than done.

    How does one avoid this common pitfall?  Ask yourself if you would rather be right, or would you rather make money.  Be right or make money?  If you are not right you must be wrong and being wrong mean that you made a mistake.  Admitting mistakes can be painful but what about losing money?  You will have to determine which of these choices cause you more pain.  If losing money hurts more, learn to admit your mistakes and get out of a trade that goes against you.  A single losing trade often wipes out several profitable ones.  Don’t let this happen to you.

    Here are three steps you can take to prevent this common pitfall and improve your trading performance:

1. Before making any trade, determine how much of your capital you are willing to lose.  Set stops.  If you use a mental stop, stick to it.
Remember that you entered the trade expecting it to go up.  If it did not, you are no longer in control of the trade.  Admit your mistake and let it go.

2.  Keep records of all your trade activity.  An Excel spreadsheet is great for this.    
 Include why you made the trade.  Was it based on a special chart pattern,   
 earnings, a special stock screen, or a tip from your Uncle Fester?  This information is of great importance as you will see trends based on this criteria.  In  addition, you will be able to make informed decisions regarding the validity of  the method chosen.

3. Include in the spreadsheet the general market trend during every trade.  Was the market trending up or down on the days you held the stock?  This will prevent you from looking at your good trades with rose-colored glasses if the market was flying high.  Conversely, it may explain your lack of success if you were fighting the tide by trading against the market.

    Remember that deciding that you must be right and holding a losing stock will waste time.  Waiting for a stock to return to the level that it was originally purchased could be a long term decision.  The worst case is that this strategy will wipe out your trading capital…fast. 

    Do yourself and your trading account a favor by admitting mistakes and cutting losses.  There will always be another trade.