Luck and the Quick Buck

Post from 9/8/10, moved from Tumblr

Ah... the world of penny stocks. The promises of multi-baggers and making thousands off just one trade suck you in before the reality of newsletter pumps, nefarious Market Maker tactics, dilution, scams and misleading "news" hit home and the novice trader finds his or herself staring at some ever-deepening holes in their portfolio.

I approached trading and the market with a high degree of caution when I dipped in my toe in March 2009 — yes, by serendipity, one day after the market bottomed — and I didn't really try my hand at the OTC/Pinksheets market for quite a few months into my trading "career" once I had some cash under my belt.

When I did, I was fortunate enough to make some small gains but in general I was either too timid to enter or my timing was off when I did. The gloss came off a succession of penny stock newsletters until I started tracking the success of a paid stock-picking service on the advice of a friend.

The cost of membership was small so I took the plunge and was soon getting daily recommendations of (mostly) penny stocks. I was amazed at my propensity to pick the wrong stocks, missing the big winners and getting stuck with the ones that immediately tanked through dilution or aggressive shorting.

Before I knew it, I was down thousands of dollars more than the cost of signing up for the service in the first place and had maxed out my trading cash. Forced into a period of reflection on my errors, I emerged from the experience having learned some important lessons — not least the reasons why so many experienced traders I know online were adamant that they never played penny stocks at all — chief among them to take profits when they're on the table and cut losses quickly.

That sounds blindingly obvious and they're the number one rules for day and swing traders -- absolutely crucial for penny stocks — but, as so many find, they're much harder to put into practice than you ever expect.  After thousands left on the table and some frustrating paper losses, I'm a much smarter and more seasoned trader. Technicals and charts are unreliable for OTC/BB stocks because there are so many other factors working against you. Blind faith that stocks on those markets will come back because they've popped big before will not work in so many cases. It's quite something to watch a $1,000 investment dwindle by 80% in a few weeks. 

Armed with that experience, I set myself a target of erasing the paper losses I'd accumulated in early 2010 by the end of the year: the plan, basically, is to start 2011 with the same amount of trading cash with which I began 2010. That means using the charting knowledge and technical analysis I've built to date, trading to a plan and either selling or mentally writing off each crappy stock, one by one.

So far, I'm 2 for 6, with paper gains potentially accounting for 2 more and if I'm successful in erasing all of those, I'll move on to four other positions from 2009 that are also horrible red blights on my portfolio!