Knowing when to sell a penny stock is an overlooked aspect of day trading. The ultimate decision to sell a penny decides if you will profit or lose from the trade. Selling too early can be the worst feeling in the world, watching your stock climb higher. Thinking to yourself, if I only had the balls to hold on longer, I would have made money. On the other hand selling and watching the share price drop, gives you that feeling of relief. 90% of traders fail because they don’t know when to sell because they aren’t a strategy.

Before you make the final decision to sell, a number of factors must be considered. In my opinion the best way to sell is by scaling out of your position. By doing so, I find it helps reduce your stress levels. For example if you own $20,000 worth of a stock and it goes up over 50-100%, it would be wise to sell half or maybe three quarters of your shares and let the rest ride. If the share price continues to ride higher you will have captured some of the upside gains and will feel less guilty then if you had sold all at once.

Consider these indicators when deciding to sell or hold onto a stock:

• How high is your risk tolerance?  Can you handle much pain?
• Are there better investment opportunities elsewhere?
• Risk to reward ratio.
• You may need the money for something else.

1. Technical Trends of a Stock

Current Trend

Is the stock price in an upward, downward or sideways trend? An uptrend means that a company has 2 or 3 up days for every down day. This would mean the price would move higher month after month. Some trends can last months other days. By buying early into a strong upward trend, you can profit significantly. To eliminate risk, only buy when it is clear the stock is trending upwards. Once the trend is over, it’s time to sell your position.

Trend Reversal

Once a stock’s uptrend or downtrend is over it can start trading erratically, giving you less of a chance of profiting from future price movements. It’s common for a trend to reverse. Learning to find trend reversals can be extremely profitable. To help spot a trend reversal before the crowd, look out for the momentum and trading activity of the stock. The most important trend reversal patterns are the topping out and bottoming out patterns.

Support Levels

Support and Resistance levels tend to hold at round numbers like $1.00, $1.50, $2.00. This is a tip I learned from legendary investor Jesse Livermore. This tends to happen because investors tell their brokers to buy or sell at nice round numbers. Volume tends to increase when share prices approach support levels. Buying pressure increases at these levels and will potentially keep the price over support. Also support levels can fail, which can take out stop losses causing a sharp stock decline. Several support levels may exist for a single stock, but each support levels can be weak, strong or moderate. Generally when a stock falls below support, it can become resistance.

Resistance Levels

These are caused by an increase in selling activity at a particular price, making it harder for it to rise above a certain level. Resistance levels can be a great place to take profits.

2. The Reason why you Bought the Stock

Does the reason why you bought the shares still apply? Has the company’s prospects improved? If the company’s growth is too slow, its profit margin is decreasing, debt is increasing or it is not executing its business model, it may be time to sell.

3. Volume of shares traded (Trading Activity)

Increases in trading activity is usually positive for penny stocks, unless there is a major sell off. High trading activity could mean the penny stock is getting a lot of exposure. If volume of shares traded is decreasing or non-existent, this would be cause for concern and you may have difficulty selling your shares. Judging whether a stock has high or low trading activity comes down following historical trading volumes.

Buy the rumor, sell the fact is an old commonly used trading tactic in the stock market. It simply means, when there is sportive speculation about a company being taken over or a company likely to get FDA approval for a drug, investors buy in anticipation that the share price will rise. Once the rumor or event happens, the buying pressure drops, investors sell to take profits, causing the stock price to fall in value as there are more buyers than sellers. Share prices hold onto unrealistic prices until the rumor can be proven as true, then the selling becomes more prominent.

Examples of rumors that spike buying interest in a stock:

• Takeover rumors
• Patent approval
• A company gets a big contract with a major corporation
• A company win a lawsuit
• Expected strong financial reports
• New CEO  or board member with a track record of success
• New investor e.g Warren Buffet buying shares in a certain stock.

For the share price to increase rapidly the event or rumor must be:

• Growing in probability
• Noteworthy event
• Widely known e.g. News about a stock could be featured on CNN

An example of a rumor being false is when there was speculation that Coca Cola were interested in taking over Monster Energy Drinks (MSNT). In the space of 15 minutes the stock price jumped $20 a share as more and more news outlets continued to talk about a potential  takeover bid.  The stock price dropped $11 a share within 5 minutes of a Representative from Coke dismissed the rumors as false and no there was intention of a takeover happening.

Buy the rumor, sell the fact is a risky trading strategy and it is difficult to find out rumors earlier than other investors. Once everyone is talking about a stock, it becomes a crowded trade and you should be looking to sell shares rather than buy them. More than likely once you’ve found out the news you’re too late, and are better off waiting for another trading opportunity to come along. It’s too hard to get an edge trading big cap stocks, as other full-time professional investors will be ahead of you. Using this trading rule with penny stocks can be a lot more viable as not many investors follow them, which gives you a higher chance of making a profit by selling into the news. Try to trade using logic, rather than based on emotion, which can be easier said than done.

OTC Markets also referred to as over the counter markets are divided into 3 tiers.

• OTCQX – Top Tier
• OTCQB – Middle Tier
• OTCPINK (Pink Sheets) – Bottom Tier

The Pink Sheets are also divided into 3 separate levels.

• Pink Current – These companies make their filings publicly available.
• Pink Limited – Only provide limited information.
• Pink No Information – Not willing or able to disclose information. The company might be sketchy or going through bankruptcy.

Best Way to Find Hot OTC Penny Stocks

• Free stock screener at www.otcmarkets.com, Equity Feed and Finviz.com. Enter your criteria and you will get a list of penny stocks. It’s useful because you can sort through stocks by volume to find cheap highly speculative small cap companies.
• Penny stock forums such as Investorshub.com, thelion.com, elitetrader.com + hotstockmarket.com
• Blogs

Evaluating Risk

• Unlike Blue chip stocks that trade on exchanges such as the NYSE, NASDAQ and AMEX, OTC stocks have an extreme amount of risk associated with them.
• With greater risk comes greater reward. Some penny stocks can even go to “No Bid”, which means they can be still bought but not sold.
• It’s common to see a pink sheet penny stock gain over 1000% or more in a trading day.

Reverse Splits

• Checkout a stocks chart to see how many if any Reverse-Splits has taken place. For example, a 1 for 500 Reverse-Split would give an investor 1 share for every 500 shares they previously owned.
• Stockcharts.com is an excellent + free charting tool.
• A reverse stock split reduces the numbers of share outstanding and are generally seen as a positive sign for a company but rarely produce great results for OTC stocks. They usually perform multiple stock splits because share price dips backs down to 0.0001.

Share Dilution

• All penny stocks should have a Transfer Agent identified. To obtain the share structure of a company call or e-mail their Transfer Agent. Ask for Shares Outstanding, Authorized Shares & Float.
• Good share structure is important if a penny stock is too diluted its share price won’t move as fast. It could take hundreds of millions of shares traded to move the price. Penny Stocks with low dilution means their share price can move more on little volume.
• This information is freely available unless the “Transfer Agent is gagged”. This means the Transfer Agent has been advised by the company not to share the share structure. This is a red flag and is a reason to avoid investing in this stock. A companies’ Share Structure can be found on Yahoo Finance.

Stock Market Forums

• After you have conducted your own research stock forums are a great place for traders to share their own research with others.
• Beware of traders pumping or bashing stocks.
• Never take anything as the truth. Always do your own due diligence and verify the information.

Press Releases

• Check to see that the company regularly publishes press releases to keep traders up to date.
• Avoid companies that have made false claims in the past.
• They are useful for clues when significant events are expected to be released. Positive news that can be verified can impact a stock’s share price.

Limit Orders  

• Don’t use market orders for penny stocks.
• Some brokers may charge a small fee for limit orders. Always use a limit order to protect yourself.
• Penny stocks are volatile so it would be wise to use Limit Orders when buying or selling micro cap stocks.

Level 2

• Shows the Bid & Ask from all the market makers.
• Level 2 can enable traders to get in and get out of a stock at a good price.
• It is available through online brokers, but some online brokers don’t offer Level 2 for OTC Stocks.

Exit Strategy

• Always enter a trade with a planned exit price in your head.
• It’s best to scale in and out of shares rather than buying or selling blocks of shares.
• If a stock does well sell half your holdings and let the other half ride.

Expect to Lose All Your Money

• Only trade with money you can afford to lose.
• Losing is a part of the game, deal with it.
• Unlike with big board stocks when you win with OTC Stocks you win really big, use large profits as an opportunity to trade other speculative stocks.

The breakout play can be a great setup to trade, but the term itself can be ambiguous and overused, so let me start off by getting everyone on the same page as to what I mean by breakout. Often people just use the term to describe when a stock starts to move up sharply, which isn’t necessarily wrong, but I have a more specific idea of what a breakout entails. If a stock has dipped and crashed for weeks and then finally bottoms out and bounces, you may hear someone say it’s “breaking out”, I call that bouncing. (TIP – Equity Feed is the screener I use to find penny stocks before they break out with high volume, poised to move higher + ignore message boards)

In general, stocks in downtrends are not breakout candidates. I’m looking for stocks that are uptrending or at least flat, and the major component is a break of key resistance (aka breakout point), then ideally there is little or no obvious resistance above that resistance. Just like many aspects of trading, this is not going to be a black and white issue, there will definitely be a ton of gray area to sort through. A good trader is going to need to be able to spot two things, key resistance and recent price action that is conducive to a healthy run.

– Key Resistance: Sometimes this is the highest point the stocks ever traded at, sometimes it’s a six month high, and sometimes it’s just going to be what you happen to determine as key resistance (though there still could be other resistance overhead). You’re basically training your eye to spot those points where you believe that once the bulls break through, the stock is going to rally. A big part of this is just gaining experience and developing your intuition based on price action. Sometimes a break-out can trigger at a point where most people aren’t really expecting it, but because you were so in tune with how the stock was trading, you were able to get in well before the crowd.

– Favorable Recent Price Action: This is an area where I see many traders make costly mistakes. Stocks tend to trade in a pattern that repeats itself over and over, just with a wide range of variations. That pattern is sideways trading (consolidation), which is followed by sharp price movement, followed by sideways trading again, and so on. When you play a break of resistance, you don’t want the stock to already be overbought and overextended in the short term, the ideal situation is playing a break of resistance when it’s also moving out of a consolidation range.

For example, let’s say you spot very obvious resistance on a chart at $1, but the stock is trading well below it at .60. It goes on a big run and closes the day at .90. That evening you’re looking at the chart and you decide that if the stock breaks $1 the next day, you’re going to buy because that’s a break of major resistance. The next day it does break through, you chase a little because the momentum moved the stock up too quickly, and you’re filled at $1.05. The stock goes as high as $1.10, but then closes the day at .85! Big failure. What the heck happened? Why didn’t the rally hold? The answer is not all breaks of resistance are created equal. In the stock market, anything can happen, so there’s always the chance that in this scenario you could still catch a runner, but if you were playing the odds, you wouldn’t have taken that trade. Just the day before it was sitting at .60, so just imagine how mabreakout was enough to absorb those sellers and then some, it’s not going to work out well. Based purely on probabilities, that’s not a soundny traders were already up 50% or more when you decided to take the breakout. You’re buying when a lot of traders were just getting ready to lock in a nice payday. Not a good idea and unless the momentum from the trade.

So when I say you’re looking for recent favorable price action, what I’m referring to is stocks that are trading near major resistance (either at, below, or above), but have traded sideways and consolidated their gains first. This allows the weak hands to bail and for those shares to be put in stronger hands. Using that last example, let’s go over a much better approach. So the stock rallies one day from .60 to .90, but this time you decide that even if the stock does move past $1 (major resistance), it’s up too much in a short period of time for you to take the break of resistance. The same result plays out, it breaks $1, you’re tempted to get in but your discipline won’t allow you to go against your game plan, and when the stock closes at .85 you pat yourself on the back for making the right decision. Now just because it failed to break that key resistance once doesn’t mean you take it off your watchlist.

On the contrary, you should now be on high alert for consolidation in this range. Consolidation near major resistance is one of the best signs to see in potential breakout setup, and this scenario could be setting up just for that. So you watch the action on this stock for a few weeks and the entire time it stayed above .80 but below $1, all the while having a slight bias to the upper end of that range. Now what you have is a perfect setup, where you had the strong move from .60 to resistance, followed by a few weeks of consolidation (near said resistance). At this point, the weak hands have flipped out, and now you have a strong base full of traders who won’t be so quick to sell into a pop. Finally one day after three weeks of hanging out below $1, it ends up breaking through and starts testing prices north of that resistance again. (This is favorable price action to look for) Instead of being overbought and having a mass of traders who are eager to lock in profits right away, you have a nice base of holders who probably won’t be looking to take profits until the breakout has already had a chance to play out and develop. Because of that, there’s also a very good chance that the momentum will then be enough to absorb that initial wave of profit takers, and the break-out even has a chance to really gain some strength and go exponential.

To summarize what you’re looking for is for the trend to be flat or up. One of the keys is the accumulation that precedes the run, and a stock that is falling or crashing doesn’t have an extended period of accumulation. On the other hand though, if the stock is uptrending too sharply or has gone up too much in too little of time, then you’re going to need to wait for the stock to level off first. The ideal scenario is a stock that is trading flat for an extended amount of time, usually the longer the better, with a slight upward bias. If you are looking to take a breakout after a sharp rally, to get the odds back in your favor you’re going to need consolidation of that rally. The more the rally has gone up, the longer the stock should then consolidate before you think of playing it. Once you spot a chart with a favorable overall look to it, then you need to spot the key resistance. There’s not always going to be one and only one resistance point, but you need to decide where you’re looking to enter. That will generally depend on the last factor I mentioned, which is a favorable recent price action. Sometimes you may see some very attractive consolidation setting up below your targeted resistance. In that case, you may decide to jump in when the price jumps up out of the consolidation and not when it actually breaks the breakout point. Sometimes you may get a break of resistance without a nice consolidation base first, in which case you may just pass on it or wait for a better entry post-breakout.

The last thing to mention is a general cautionary warning that really applies to any setup or method you trade. Breakouts have their periods where they work unbelievably well, and they have their periods where they’re few and far between, and the ones that do rally don’t sustain themselves nearly as long. When I first discovered this strategy, I thought I found the holy grail. I was convinced that this was my one method I’d be able to stick with and week after week make great returns. Fast forward to the present and it’s still not favorite and most frequently used method, because I’ve learned that the results will vary greatly and therefore I need to be aware of the environment I’m in, and trade accordingly. Some options to consider depending on how breakouts are performing are aggressiveness, position sizes, when and where you take profits, etc. and sometimes you may just ignore the setups altogether. Even in the slowest of times for these setups, I personally usually never stop scanning for them and playing them entirely, since the potential for profiting is pretty much always going to be there.

I’ll finish up with a quick example.

The most ideal entry I’d recommend in a situation like this is playing a break of the consolidation that takes place near the channel’s resistance. This consolidation may take place under, at, or above resistance, but in this case, it formed on top. Not all breakouts will set themselves up with neat consolidation ranges prior to the rally, but the ideal ones will. I tend to focus on ideal setups and pass up the rest. As a trader I’m not trying to catch every runner I can, I’m merely trying to make money and then not give it back.

I highly recommend everyone get accustomed to playing these and learning the principles behind them. Even if you don’t focus on primarily trading these setups, the fundamentals that make up the strategy can apply to many other methods. Being able to spot support and resistance, spotting the overall trend of a stock, knowing when a stock is in a favorable position to move up, watching for the repeating pattern of sharp movements and consolidation periods, are all things that can apply to your trading in general.

Lotto plays are usually going to be a sort of breakout or beat down bottom play, but they have a couple characteristics that make them lottos, mainly absurdly high risk and reward. I like to think of them as “all or nothing” plays, kind of like a lotto ticket, where you’re either losing your entire investment or you’re hitting the big one. There is no official criteria for a play to be considered a lotto (other than high risk and reward), but I tend to think of most of them as being triple zero penny stocks / pink sheet stocks (.0001 – .0009), though they don’t always have to be.

Lottos often will have very low volume, where the plan is to buy when the stock is seemingly dead with the intention of selling it one day into strength and momentum. An example of a lotto success story would be EESO, where it ran from .0005 to a high of .05 in less than a month and a half. That is going to be the best case scenario, but if you hold out for the 100 bagger every time you’re going to miss out on smaller but still impressive runners. The key here is to sell in portions into the strength, locking in profits along the way, though still leaving some on the table to try and capture that next penny stock that makes it big.

Now to get more specific as to what to look for, I’m going to use one of my current lotto plays as an example. I’ll break it down as to what I like about the chart and why, and we can watch to see if it ends up flying to the moon or sinking like a stone. I’ll also preface it by saying this, the odds are that your lotto play will not work out for you. It’s just not that easy to find those elusive runners, but you won’t catch one if you don’t try and just one winner can make up for many losers. One thing to remember is to only use gambling money to play them. You wouldn’t go out and spend next month’s rent money on lotto tickets and you definitely shouldn’t do the same with lotto plays.

Now for starters, you’re going to need a stock screener which offers long term charts. EquityFeed’s charts (see my review here) only go back a year, so you’re going to need a program that goes back further than that. StockCharts.com’s free charts can go back up to 3 years, which is fine, but a paid subscription will allow you to go back much further. Nothing beats StockCharts.com as far as long term charts go, and their free service’s 3 year perspective should suffice in most cases. Typically 3 – 5 years worth of data is enough to see the big picture, though it won’t hurt to go back further. Also, when looking at longer term perspectives like this, I recommend switching over to weekly candles. Now that you’ve got the chart up and can see the action from the previous years, here are some things to look for:

-Bloodshed: I like to look for the stocks that have been mercilessly beaten down, often for multiple years in a row. It’s not uncommon for these plays to have gone through reverse splits, which are absolutely horrible to shareholders of penny stocks, and that results in many disgruntled bagholders. With sentiment so low, it’s going to result in nothing but sellers and very little buying, and market makers can and do use this to continually short the stock into nothingness. Bloodshed alone shouldn’t be a good enough reason to buy, since these selloffs can last for years and years thanks to poor sentiment, short sellers, and company backed dilution. You need to see a sign that things have changed for the better. The company itself doesn’t necessarily have to be turning things around, but you should see something in the chart that is hinting at it.

-Broken Downtrend: By looking at the past 3 – 5 years (or more), you can now easily see the bigger picture and draw some trendlines to add structure to the action. Start at the top and connect the tops of the candle bodies. This is an art and not a science, everyone’s trendlines may be a bit different and you may be able to draw multiple lines. The key is to identify what looks the most obvious to you and draw the line so it hits as many peaks as possible. In the link below of the example I used, you can see the two trendlines I drew, with the thicker one having multiple times it rejected the price. I drew an X to mark every time the price bounced off of that line. When you see that main trendline has been broken, that can often be an initial sign of things slowly but surely starting to turn back around.

-Moving Averages Stop Free Falling: Once again I’m referring to the long term weekly chart, and one moving average I like to use for this is the 50 week MA, which averages the closing price for the past 50 weeks. When this is free falling, you know the long term trend is pointing down. When it’s been declining sharply for years, you know the stock has been ruthlessly beat down for quite some time. When it finally stops it’s falling and starts to even out, that too (like the broken trendline) can be a sign that the selling has subsided and maybe even some accumulation has been taking place. The flattening of this moving average generally follows a long period of consolidation or sideways trading.

It has the attributes I just mentioned, starting with years worth of down trending, selling, and reverse splits along the way. It has the major trendline identified with numerous rejections of the price trying to break through (and finally getting over it). It has the 50 week MA finally flattening out, and the price is now just a couple of ticks away from actually trading above it, which would enable the line to possibly start angling up. Finally, something I didn’t mention was volume. When you see these signs taking place, ideally you’d like to see bullish volume start to come in, especially if it’s taking place while the stock is fighting through resistance. In April of 09 you can see there was a huge volume spike, and though it wasn’t enough to break through the trendline, it did enable the price to move a step higher and get in a position to eventually break through. Without the heavy volume pushing the price up at this critical time, then there’s really no reason to believe the stock is close to reversing it’s trend.

Now all these things I mentioned are what I’d consider ideal, but a lotto play doesn’t have to look exactly like this. EESO for example didn’t fit this mold and another recent example, GOIG, didn’t either. Both of these did meet one criterion I mentioned, and that was the bloodshed that preceded their insane rallies, and possibly you could add the trendline break (depending on how you drew them). The moving averages never had a chance to flatten out, so the main difference between these two and what I hope plays out for MONA is the former were basically lotto bounce plays, whereas MONA would be considered a breakout lotto. The breakout lotto will form a long base from sideways trading (hence the 50 week MA flattening out) and you can then identify where the major resistance lies at. If you go back to the MONA chart, you’ll see I drew a red horizontal line at .0004, where 18 out of the past 19 months the price has stayed below it (very obvious resistance). A break of that resistance is where I’d put the trigger point on this play, meaning once that get’s broken I’d expect breakout players to start buying in. Timing the lotto bounce plays is much tougher than the breakout variation, but looking for long term support and reversal candles on the weekly chart is a good start, just remember the key to both of those varieties is the major downtrend and selling that kicks everything off. The only obvious exception I can think of are the setups where the stock is virtually dormant and there is little to no history of any sort of volume going into or out of the stock. In these cases you’re hoping that one day the stock wakes up and comes to life, most likely because of news or rumors.

Now as for the example I used, instead of using a stock that has already successfully proven to be a lotto winner, I decided to use one that’s in progress at the time of writing this. If it does end up turning into the next crazy runner of the penny world, then we get to witness firsthand one play out. In the more likely event that it fails to pan out as such, everyone can see for themselves just how risky lotto plays are, and how most of them end up. Like I said though, you’re not going to catch lighting in a bottle unless you try, but I wouldn’t recommend playing them with anything other than throwaway-money. One last aspect to mention is these types of plays will require patience. If I find a setup I like enough and have some extra cash I can afford to throw at it, then I do so and pretty much forget about it. I tend not to use stop losses on these plays, especially the real low triple zeros, instead I just throw as much as I’m willing to risk into them. Only throwing a small chunk of change at a trade may seem pointless, but tell that to the guy who put $500 into EESO at .0005, then cashed out in portions all the way up. This isn’t a method that I’d recommend basing all of your trading off of, but allocating a (very) small amount of your capital to lotto plays leaves you with the possibility of hitting the big one while not exposing you to much risk.