How to Profit from the Volatility of Microcaps (Penny Stocks)

02/17/2008 12:00 am EST

Focus:

Timothy Sykes

Author, An American Hedge Fund

Timothy Sykes, founder and president, BullShip Press, gave traders pointers on how to take advantage of the volatility in penny stocks…

Sykes, also the author of An American Hedge Fund, told traders that he made his first million buying penny stocks, and his second, shorting them.

But, he cautioned attendees that penny stocks generally have few business fundamentals. Their price is often determined by the perception of the business, creating great volatility. The good news is that traders can play these large intraday peaks and valleys, but don’t hold the stocks for more than a few weeks.

Sykes also warned traders not to get caught up in the stories, as penny stocks are often hyped by boiler-room brokers and stock promoters who issue press releases and talk the shares up on bulletin boards.

Instead, you can use this manipulation by profiting from the patterns that allow for repetitive profits.

To demonstrate how to profit, Sykes took attendees through each of the trades he has taken since 1999, specifically pointing out certain lessons he has learned, including:

  • Focus solely on chart patterns

  • Short selling is not easy; many penny stocks are illiquid and short squeezes last longer than expected. Don’t force trades that aren’t there and do not short when major trends are against you.

  • Three out of four stocks follow the market

  • Undisciplined trading leads to losses

  • Take losses quickly

  • Focus on trades only during market hours

  • Always be afraid of any ticker with an X or Q in it

  • Be nimble; opportunities arise all the time

  • Never trade an illiquid position or invest in an illiquid stock

  • Losses are better teachers than wins

Lastly, Sykes cautioned traders that we are in a bear market right now; it is definitely not the time to buy stories.

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