It is easy to caution people to keep their emotions out of their trading activity but this is much easier said than done. After all, human beings are highly subjective so it is probably allow for your emotions into account when making your trading decisions. For instance, you may intuitively dislike a particular company and find it hard to implement your trading strategy for that stock. Other things that you should take into account are the time and effort required to implement a particular strategy and the trading capital that is required to make it work. You should also consider the impact of the loss of your capital and whether you have the patience to see your strategy through. Finally, you should ensure that you do not suffer sleepless nights as the result of a high-risk strategy. After all, penny stocks are high-risk investments.

Because it is often little hard information that is available, you need to use every scrap of information that you can find and then determine your entry and exit points. Unlike conventional stocks, you may not have enough information for the back testing of your strategy to determine your chances of success. Conventional investment-grade stocks can be reviewed at periodic intervals but this is not possible with penny stocks where developments can often be sudden and dramatic.

As long as you make sure you diversify your investment and don’t put too many eggs in one single basket, you can probably live with penny stock investing risk. You are going to have to work hard to gather information on potential investments but, if you do not do your homework, there’s a good chance that you will end up losing money. As experts never tire of saying, the line between gambling and speculation is the degree to which you can control your risk.

One of the most important parameters of investment strategy is the time frame in which you are going to trade. It is axiomatic that, the shorter the time frame, the better your control of risk. On the other hand, if you lengthen the time frame, it can be less stressful while reducing transaction costs. Frequent trading can be profitable but requires a great deal of intensity and focus. Because you are trying to exploit narrow windows of opportunity in penny stocks, you have to stay right on top of market developments all the time. Realistically, you can succeed with fairly simple penny stock trading strategies so there is no need to complicate things for yourself. In short, there is no substitute for sound common sense.

• Penny stocks are cheap for a good reason that is reflected in their stock price. The reality is that many of these businesses are start-ups avoiding the expenses of an Initial Public Offering or they do not have a business plan or model that is sufficiently attractive to attract other forms of investment. This does not necessarily make one of them a poor investment but realistically with your chances of profiting from your investment are not good. It is possible that you could identify a company that becomes the next Microsoft and provides you with stratospheric returns but you have to live with the fact that these opportunities come far and few between. In fact you would be lucky if you made one such investment in 10 years.
• Where possible, look for shares with reasonable daily volumes of trading. If a share trades 1 million shares in one day and then does not trade for the next month, the average daily volume drops to just over 30,000 shares. This example also illustrates the importance of timing because if you do not catch the one-day and the trading volume happens, you will not have a chance to trade for the next month. You will also want consistent volumes so that you can enter or exit as you choose. Also check whether one small group of traders are accounting for the volume because this means that the price is being manipulated. Without establishing liquidity, you are probably staring a dead investment in the face and will need to take substantial sacrifices in price just to sell your holding.
• Establish if the company could be profitable in the long run. Most start-up businesses tend to lose money in the short run and the key to good management is to establish long-term sustainable profitability. If your potential investment passes this test, you are less likely to lose capital and more likely to earn acceptable returns on your investment.
• Penny stocks tend to be volatile and a 20% movement in price either way is not uncommon. Establish a proper trading plan with stop losses and ensure that you stick with your stop loss to minimize your losses. If the price is moving upwards in your favor, you should consider using a trailing stop loss. In other words, if you buy a one dollar a share in the expectation of seeing the price of $1.20 per share and the price actually reaches $1.30, you can consider moving up your stop loss to $1.20 and protecting your profit.

The best way to spot these promising penny stocks is to identify and develop the criteria that you will use for identification and then use the appropriate tools to complete the process. For instance, the criteria you develop to investigate the approximately 3500 stocks that trade on the OTCBB may look something like this:

-You will want any stocks that are priced as low as possible so that you have the maximum upside if there is upward action on the price. You may therefore want to search for stocks that are priced between $.05 and $2 (some sources say that the average price of a penny stock is in the region of $.10). Shares that are more fully priced may not be suitable candidates for you.

-A certain degree of liquidity is desirable so that you can either buy or sell penny stocks in the quantities that you wish. You may therefore wish to look at stocks where the average daily trading volume is 75,000 shares or greater.

-Use technical analysis to make sure that the stock price is trending upwards. You may wish, for instance, to consider stocks where the nine-day simple moving average is greater than the 18 day simple moving average so that the upward trend is established.

-You do not wish to select companies that are bleeding cash because they could go under at any point in time without warning. You will want to exclude these companies as well as companies that show a negative EPS or a decline in existing earnings.

-Finally you should check out every possible bit of information or news on the companies that you have short listed. Check the charts on the stock prices to ensure that all the indicators are healthy.

A useful tool for investors who are serious about penny stocks is a stock screener. You can obtain both free and paid stock screeners but, either way, the challenge is in finding a screener that gives you the best combination of fundamental and technical analysis. If you cannot find the right combination, go for a screener that delivers on technical analysis and you can then subsequently perform fundamental analysis on the candidates that remain. It is not uncommon for you to find yourself unable to obtain enough data to perform basic analysis.

Commonly penny stocks and microcap stocks are terms that are interchangeably used even though one is a classification by market capitalization and the other by stock price. A stock with a market capitalization of between $50 million and $300 million is generally regarded as a microcap stock while, according to the SEC, any stock with a value of five dollars or below is regarded as a penny stock. Many investors consider stocks below a price of three dollars to be penny stocks while others regard one dollar as the maximum price. In fact, many experts and seasoned investors consider all of the stocks that trade on the Pink Sheets or the OTCBB (over-the-counter bulletin board) to be penny stocks.

Here are the major factors that contribute to the high risk of trading in penny stocks:

Lack of information. No matter what kind of stock picking technique you use, a successful investment strategy requires sufficient information for you to be able to carry out a proper analysis. For microcap or penny stocks, there are no regulations regarding disclosure and information can often be hard to come by. There are no statutory requirements for filing financial statements with the SEC, for instance, and the stocks do not receive the kind of scrutiny that they would if they were listed on the NYSE or NASDAQ. Moreover, much of the information that you might be able to gather is not from reliable sources and you should therefore exercise caution in incorporating this information into your analysis.

Lack of listing standards. Unlike the reputable stock exchanges like the NYSE or NASDAQ which have minimum standards that have to be met to maintain the listing of stocks, both the OTCBB and the Pink Sheets have flexible minimum requirements. For instance, the OTC BB requires timely filing of statements with the SEC while the Pink Sheets have no such requirement. These requirements can often provide some degree of comfort to the potential investor.

Lack of liquidity. Penny stocks or microcap stocks often suffer from further liquidity. This means that you may not be able to sell your stock when you want to or you may be forced to make unacceptable concessions in price in order to find a buyer. A low level of liquidity also provides unscrupulous intermediaries with the ability to manipulate prices. They will often acquire large quantities of stock at rock bottom prices and then hype the stock price to higher levels before offloading. Innocent investors are then left to bear the losses arising from these manipulations.

To be sure, there is money to be made in penny stocks for the discerning investor who is able to devise suitable strategies to offset the higher risk. Just be extremely cautious in your investments so that your losses are kept to an affordable figure.

So let’s review the first three picks again.

CMLT: CMLT was recommended two weeks ago at it’s closing price of .001. CMLT is now worth .0018 for a 80% gain (not including the intraday fluctuations that could have netted a larger gain). This is down from the 300% from last week. Still a winner.

PTSH: This penny stock was recommended two weeks ago at it’s closing price of .0014. Today PTSH closed for .0015, giving it a gain of 7%. Again we exclude the intraday trading. This covers the 7% loss from last week and gains another 7% to make this a winner.

MIRA: This penny stock was recommended at it’s closing price of .04 two weeks ago. MIRA is now at .03 for a 25% loss. A gain could have been made last week at 12%. But holding out on hopes for more would have been costly.

This gives us a total average, from the first three stocks, of 20.6%. Still a nice little gain for a two week holding.

Now let’s look at the penny stocks listed early last week.

TNRI which closed at .0032 last week, is now worth .0026. This gives a 18.75% loss. Ouch.

SOYO which closed at .4 last week, is now worth .39. This gives a 2.5% loss. A loss, but not devastating.

RPDM which closed at .0027 last week, is now worth .0013. And worst of all, we get a 51.8% loss.

Let’s keep a running 2 week tally from this penny stock list, using their daily picks at random to really determine profit potential. Since we have reached the two week mark for the first three picks, lets assume a low 100$ investment into each pick. After selling, the initial 300 investment would now be worth 361.8.

That means we place 120$ into each of the current three picks.

We will revisit these picks later in the week when they get closer to the two week mark. But now we will introduce the next three.

ZIPI .029

NXHD .0012

MDOR .7

If I had to venture a guess, then I would say that this hot penny stock picks list is nothing but a hype site that spits out random penny stocks. I have yet to see a discernible pattern for their picks and that is why I have withheld the URL until I have determined their legitimacy.

For those who do not know, a pump and dump scam is when a stock is purchased, overly hyped to investors to artificially inflate the value, then dumped by the original owner and originator of the hype. This in essence drives the investors money into the pocket of the ‘pumper.

Well, last week we were given three penny stock picks and I will now review them and see if money could have been made up to this point.

CMLT: CMLT was recommended last week at it’s closing price of .001. Today CMLT closed at .003 for a 300% gain (not including the intraday fluctuations that could have netted a larger gain.

PTSH: This penny stock was recommended last week at it’s closing price of .0014. Today PTSH closed for .0013, giving it a loss of 7%. Again we exclude the intraday trading, but see that .0014 appears to be a cyclic top and less likely to break out. Probably not worth holding.

MIRA: And finally, this penny stock was recommended at it’s closing price of .04. MIRA closed today at .045 for a 12.5% gain. Not substantial, but still a gain.

Overall, if we have diversified investments we would see an average gain of 101.8%. I have to admit that I am intrigued and will continue this experiment by looking at the next three recommendations:

TNRI which closed at .0032 today.

SOYO which closed at .4 today.

RPDM which closed at .0027 today.

On Friday we will take a look at all 6 and see how they performed. If everything maintains this kind of consistent behavior, then we may have some hot penny stock picks on our hands.