The best way to trade penny stocks is to time the breakout with limit orders and exit after realizing a quick gain. Penny stocks are for scalping, no for holding onto. The majority of the penny stocks illustrated here have at some point gone back down significantly in a market correction where the stock became overvalued. The key is to exit the trade at this point in time before the market corrects the equity you have in the trade and you lose money. With penny stocks, market timing truly is the key.

Many significant breakouts can occur within a couple of hours and be finished before the majority of traders have had a chance to cash in on them. For that reason I recommend getting an accurate alert service like the penny stock alert service I use. If you don’t know when a stock is going to break out and don’t have accurate market alerts to let you know of a possible trend forming, you don’t stand a chance at getting in at the right time.

Here’s how I recommend trading penny stocks: find a stock in your alert service that has been flagged green for buying and place a limit order on it just above where it’s currently trading. This allows your trading platform to wait for the breakout to occur before buying into anything. Immediately after placing this limit order, place an additional limit order to exit the trade at a quick 20-50 percent profit just before the rally appears to have peaked. You don’t want to wait until the rally is at its peak for a number of reasons:

1. Stocks fall faster than they rise. It’s a common saying in stocks that bulls go up the stairs while bears fly out the window, meaning a bull market is typically patient and trudges upwards gradually whereas a bear market implodes with fear within seconds. Be aware of this and do yourself a favor by exiting right before that implosion happens to insure your exit trade gets filled.

2. Order placement may take a while when volume spikes, especially if you are trading a large number of shares. Brokers process orders in the order they are received, so if you are behind several large orders of 10,000 shares or more, your market timing may be compromised.

Enter the trade as soon as the breakout occurs and exit it right before the peak of the rally occurs, and you should walk away with a safe profit that will net you most of the market trend safely and without incident. A single trade like this can land you 20-50 percent ROI in a single day of trading. Just remember, if you get too greedy, the market may punish you for it later.

Types or Orders

There are two main kinds of orders you want to be aware of when trading penny stocks as each one has a specific purpose in trading. There is a time for both to be used in the markets. The question to ask is what is more important, immediate entry into the market or a guaranteed price to enter into the market. Typically the latter is more important than the former, but sometimes when a penny stock is about to jump it pays to get in early.

­-Limit Order

This is an order that guarantees a price but not a fill. What that means is that the limit order secures you a price at which you will buy the stock, but if there are too many orders before yours and the market price is fluctuating too quickly, you may miss your chance to have your order filled by a buyer or seller. Keep this in mind when trading. Limit orders are an effective way of entering into a trade with caution but can also mean losing opportunity if you are too cautious.

-Market Order

This is an order that guarantees a fill but not a price. A market order will aggressively seek out anyone buying or selling a particular stock and sell it to them at whatever its current market value is. This is a great order to place when you know you are in a great position to enter a trade and don’t want to wait for a fill to occur.

-Stop Order

A stop order or a stop loss is an emergency order you place on the trade that automatically exits the trade when you have lost a certain amount of equity. These are important to have in a disciplined and rational trading system. Be sure not to get caught up in overconfidence enough to not place a stop loss in your trade with penny stocks as a collapse can happen literally in seconds.

How to Use an OCO Bracket

My personal favorite way of trading is to use an OCO bracket or one cancels other bracket. This is a conservative trading strategy that gives you a guaranteed range of motion which your stock can travel before you will either exit with a profit or exit with a controlled loss/minimal profit. Having this keeps you very safe in a trade.

An OCO bracket essentially works by placing one limit order and one stop order on a single trade, the limit order being placed at your expected profit point in the trade and the stop order being placed at your emergency exit point. After one order is filled, it automatically cancels the other so it doesn’t fill as well, hence the term one cancels other.

I recommend trading these with penny stocks in a particular range every time you enter a trade. The forecast for the stock will tell you what this range should be and help keep you out of trouble, but it’s a matter of you having the discipline to follow through with your trading plan above anyone else’s advice that will save you should your trade turn against you.

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