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Know Yourself

Screening 101

Know Your Environment

Sector Rotation

Risky Business

Know When to Sell

Trading listed stocks is a lot easier than trading OTC BB stocks, but a lot less
profitable. There are ton's more penny stocks than listed stocks and an even
smaller percentage of them are legitimate. This makes finding a solid over the
counter issue the equivalent to finding a needle in a haystack. When trading these
issues over a short term time horizon is it worth the time and effort to weed out the
scams and shell companies, or should we focus more on technical analysis? The
answer is both, but don't spend all of your time sifting through 100,000 or more
companies, unless you are looking for the next Microsoft and plan to hold on for
ten years or more. Even if you pick ten stocks that you think will break out of the
basement and get listed over the next few years, nine of them will probably be
worthless, and one will have doubled or tripled, leaving you with a lot less money
than you started with. We feel that by screening these stocks for tradability,
volatility and activity, we can then use this smaller list to find tradable companies
that have good short and long term prospects. We control risk by diversifying our
portfolio and by constantly taking money out of our profitable trades and adding it to
our unprofitable ones. When looking at penny stocks, all of the usual parameters
that you may be familiar with in the listed world need to be thrown out the window.
The definition of a penny stock can be interpreted to mean any variety of things.
Most new investors simply look at price per share when deciding if they are looking
at a penny stock and have there own price requirements. Securities regulators
use price per share as only one factor out of many when determining a companies
penny stock worthiness. The also look at whether or not the stock is listed, what
the market cap is, if they are involved in an established business and are their net
tangible assets less than or greater than five million dollars. Including all of these
elements will help us determine what kind of investment we are dealing with and
what kind of goals we should have. Many companies that have an established
business and large assets may be trading for pennies a share because they are
extremely undervalued, or they may be on the verge of destruction. New and
emerging companies that trade under a few dollars may be considered pure penny
stocks, but are they good long term prospects, or just a flash in the pan. Knowing
as much as possible about the business's in which these companies are engaged
will help you answer these questions. We screen all stocks for price first, then
sort out the true penny stocks. Although we don't agree with the governments
definition of a penny stock, we do include all of the same factors when trying to
find a short term trading opportunity.

OTC BB, and Pink Sheet stocks. There are only around 150 NASDAQ and AMEX
stocks that trade under a buck. Although we normally do not trade these issues,
it's important to get a feel for how they stack up against our unlisted securities. We
rarely trade pink sheets because there is such little information available but we
watch them because there are many popular fallen hero's that soak up a good
percentage of trades per day. There are hardly ever any NYSE stocks under a
dollar and when there is one it is important to watch it to see what happens. The
main advantage besides the lack of ECN's to trading OTC BB stocks is that they are
in little or no danger of being delisted. You don't have to worry about which stock
will get an extension to the NASDAQ minimum bid price and who will and won't get
favorable treatment. Some of these stocks can be good companies but just a hint
of delisting can send them into a downward spiral with no hope of returning.
Meanwhile there are thousands of penny stocks on the OTC BB, some of which
are better companies than their NASDAQ rivals. With so many stocks available for
us to trade on the OTC BB we must be careful to look only at ones that have similar
trades per day and volume than listed stocks. It's easy to see that OTC BB stocks
that have had nice run ups started out with one little spike and heavy volume,
settled off a bit and then later picked up more and more momentum. One must
realize, however that there are twice as many issues that spike up and add volume
for the first time and then return to the doldrums for months or years. We feel the
only way to avoid this is to have a good perspective on where all of the penny
stock traders are, where they have been and where they may be going. We may
watch a couple thousand stocks, but there's only a few hundred that we will
consider trading.