A penny stock is any stock that is trading at less than $5 per share. Penny stocks are obviously riskier than larger more stable companies and they primarily move up or down based on speculation of what they could become in the future. However, the right penny stock can provide tremendous profits for the penny stock trader.

You will find penny stocks in each exchange. I focus primarily on the NASDAQ, OTCBB, NYSE, and AMEX. There are many who enjoy trading penny stocks found in the Pinksheets, however, I tend to shy away from them. Today there are many well known companies that have been relegated to the penny stock status (Citigroup, AIG, E-Trade, Blockbuster, Jamba Juice, Fannie Mae, etc).

When looking for a good penny stock to trade you should look for stocks with good volume. I usually look for companies that trade at least 500,000 shares on average (although I will make exceptions). Rather than trying to survey the entire universe of penny stocks I believe it is best to make a list of 10-20 stocks. This allows you to become more familiar with the individual companies and have some familiarity with their trading patterns.

I would recommend trading penny stocks on the basis of technicals. Let’s be honest the fundamentals of a penny stock are not too great so I wouldn’t put much confidence in the numbers. Primarily look at a 3 month chart, a 1 year chart and a 3 year chart to determine the overall direction of the stock. Look to see if it has broken a resistance and see if the trend is up. You do not want to fight the trend. Do not try to catch a falling knife with a penny stock. You can get your account cut up pretty bad.

If the stock has made a large move then wait for it to pull back to a level of support before entering the trade. This often provides nice profitable trades.

Remember, penny stocks are speculative trades. Do not plan on being in them long term. Determine what type of profit you are looking for and if you have achieved it then get out. They can turn and give up all profits in a hurry. I usually shoot for about a 20% move. However, if it seems to stall then I will get out and try to put my money to work elsewhere. You will have days that you make an easy 30-40%. When you do get fortunate like this do not be greedy. Take you profits and look for you next opportunity.

Trading Penny stocks can be exciting and financially rewarding. But remember that they come with risk. Be smart and never stick you entire account in any one penny stock. Do your own research into charts of the companies on your list. Stay away from penny stock forums. You will have a tendency to enter a trade without proper trading patterns being formed. Trust your own instincts and research.