Penny Stocks Case Study

On December 29th we examined sub-penny stock LDPP after receiving several emails from readers wondering what was going on and whether they should take a chance with the stock.

LDPP stormed out of the gates, opening at $0.01 after closing the night before at $0.0026 for a gap of +280%. People got excited. Hey, was this a real winner? The stock went on to move hard but ended up closing the day at $0.012, close to where it had opened. Those who bought at the open but didn’t sell ended up making no money.

Today the penny stock crashed 54% to close at $0.0055 and traders who couldn’t sell quickly lost half their investment. No bueno.

And as we discussed yesterday this is typical of gapper stocks, which is why you are always careful if you decide to play with them. We generally avoid them.

However, one of our readers, Maurice Lampl, contacted us, suggesting a trading tactic he has used to avoid becoming a bagholder with gapping stocks, yet at the same time providing him the chance to benefit from excessive buying that caused the gap to begin with.

“I simply won’t chase these stocks that have gap opens,” says Maurice. “A high percentage of stocks gap open at the high and simply plunge after that, or after a tick or two. I simply ignore these ‘gapped’ stocks and go for those that have more normal opens and make runups on whatever triggers them and get out when runups are exhausted or when they close at the high,” he added. “What I do is place a limit buy entry stop 5% above the previous day’s high and follow it up with a 5% trailing stop if entered. If the stock gaps open above the 5% entry point, well, no entry. If entered, I use a 5% trailing stop and get out if hit. This has worked pretty good for me. I also get out at the end of day and make sure that I have no postions at market close. You get lots of profitable bits that add up and hit a “big” ‘un once a while.”

And we think this is a sound approach, so we thought we would ammend what we said about avoiding gapping stocks altogether. Truth be told, if a huge promotion campaign is underway or some other powerfully disruptive move (big news?) is in play, some stocks can gap and keep running for a day or two, so getting in even if the stock has moved at the open is probably a good move. And of course, you protect yourself on the downside with a 5% trailing stop to bail if things turn south, as discussed above by Maurice. We like it.

Thank you Maurice for sharing your take on trading penny stocks. As a rule, we welcome any of our readers to chime in at any time with information that makes us stronger penny stocks traders. The moment we all stop learning we’re cooked.

Wishing everyone an awesome farewell to 2011.

We’ve got some mighty good penny stock picks for 2012 and are honored in having you with us.

All the best always,

Jeff Mirkin
Admin

http://www.damngoodpennypicks.com