Before beginning to trade penny stocks you need to spend time educating yourself how to trade penny stock successfully. After all, you do not invest your money simply for the experience. You invest to make money. There are things that you will need to learn so that you end up making thousands of dollars rather than losing thousands of dollars.

Pick The Right Penny Stock Broker

Before beginning you need to choose the right penny stock broker. Now this is fairly simple to do. There are really only two things that you need to keep in mind. The first is that you do not want to use a full service broker. The cost of the commissions will eat into your profit too much. The only reason to ever choose a full service broker is if you plan on relying on the stock picks of a broker. Most full service brokerages do not want their financial consultants suggesting that their clients buy penny stocks. So for all intents they are not the right choice for a penny stock broker.

The second thing that you will want to keep in mind is choosing the right broker if you plan on shorting penny stocks. There are certain brokerages that are better at obtaining penny stock shares to short. A few of them would be Think or Swim, Interactive Brokers, Sago Trading and maybe Zecco. If you do not plan on shorting penny stocks then any discount brokerage where you commissions are $8 or less would be a good choice.

Practice Diversification at the Start of Trading

I am not a big fan of diversification. I prefer to manage only a few stock picks at a time and watch them closely. With the being said, I would recommend that the beginning penny stock trader practice diversification. Until you have learned to trade and have honed your craft you will not want to put large chunks of your trading capital on an individual trade. Until you have learned to control the emotions of fear and greed you are putting yourself at risk. I would recommend never committing more than 10% of your trading capital to any one trade when you are new to trading. Once you are more comfortable with what you are doing and have shown the ability to cut losers before they become a drag on your account you can consider increasing the amount that you commit to any one trade.

Do Your Own Penny Stock Research

What I really mean here is to not only do your own penny stock research but also to make your own trading decisions. Do not lean on stock picking services or penny stock newsletters. You have the ability to make your own trading decisions. I make most of my trading decisions based on technical factors. I perform fundamental analysis only to assure myself that I am not stepping into a company that is going to go belly up anytime soon. I am usually not interested in the long term viability of a company. I am a penny stock trader and have a short time horizon. In fact, if you are using a strategy that shorts penny stocks then you might want to attempt to find companies that do have fundamental problems and short them whenever they get a spike in price. Penny stocks traders such as Tim Sykes has made a nice living doing this for years.

Adopt a Penny Stock Trading Strategy

Most successful traders use a particular strategy that they feel comfortable with. There are some traders that “trade from the gut” but most only lose money that way. If you pressed those that claim to “trade from the gut” you will find that somewhere in their mind is a set of criteria that they are looking for. That, in essence, is their system. You need to know what will cause you to enter a trade. Is it a technical indicator, a breakout, a divergence between indicators, a result of your penny stock research, etc. How much profit are you looking for on each trade? Where will you exit the stock if it moves against you? Will you enter full positions or partial positions? How much will you commit to each individual trade? There are many questions to answer. Sit down before beginning and lay out a specific attack plan and then execute it religiously.

So you are considering buying penny stocks online. Before you begin trading there are a few things that you should know. Many penny stocks are ideal for trading but all penny stocks are not equal so do not just run in and start buying the first penny stock that you see. You are going to want to be a little choosey when trading penny stocks.

If you are going to actively trade penny stock then you should only trade stocks that meet certain criteria. I set certain standards for myself that I will tell you about but you will have to determine what standards you want to choose for yourself.

The first criteria that I focus on before trading penny stocks online is the price of the penny stock itself. As you probably know a penny stock is considered to be any stock that is trading at less than $5 per share. However, I am a bit more picky than that. Some people think that penny stocks are those companies that are trading at less than a penny. Officially they are penny stocks but are more commonly referred to as sub-penny stocks. I never touch sub-penny stock. I even have a hard time considering these companies viable. I recommend that you stay away from them but you will need to make your own decision on that front. In fact, I never trade penny stock below 50 cents and rarely trade stocks that are below $1. It is more of a comfort thing for me. Actually the sweet spot that I tend to trade in is from $1 – $4. You may be different. But this is what I find works for me. I know many people are successful trading 9 cent penny stocks but that is not for me.

A second criteria that I focus on in my penny stock trading is volume. I do not want to trade thinly traded stocks that may be able to be manipulated. Once again you will have to determine what volume level that you are comfortable with but I prefer to trade stocks that trade at least one million shares on average each and every day. I use the 3 month trading average to gather this figure. Although one million shares a day is what I prefer, I will trade penny stocks online that have lower volumes. The lowest that I will go is an average of 300,000 shares per day. There seems to be to wide of a spread in penny stocks that trade less than that. I do not want to trade penny stocks with large spreads. I prefer my spreads not to be any wider than 2 cents. I find that when I stick to companies that trade more than 300,000 shares per day on average that it is not a problem in finding tighter spreads.

I do not use too much in the way of fundamental analysis in making my trading decisions. I will look at debt levels but I do not care about earnings or revenue for that matter. I am not investing in the penny stock long term. I am looking for a short term trading profit. I base most, if not all, of my trading decisions on technical analysis.

I basically use three different trading strategies in my trading. I trade penny stocks that 1) are breaking above resistance, 2) have broken above resistance and have now pulled back to a significant moving average and 3) have had large upside moves and are now poised to pull back. The first two strategies are traded on the long side and the last strategy is a short strategy.

I will cover each strategy in detail in the coming days.