I’d be lying to you if I didn’t like action.
You probably do too if you trade penny stocks like me.
Often times penny stocks are the fastest and biggest gainers…
… We’re talking about returns as high as 167% in one single day….
.regardless of what the overall market is doing.
For example, stocks rallied big-time on a headline that President Trump will be meeting with China’s XI to discuss trade at the G-20 Summit, at the end of this month.
The hope of a potential trade deal was good enough.
However, if you look at yesterday’s biggest movers(gainers and losers)… they were all penny stocks.
Now, there is no denying the potential that small-cap penny stocks have to offer. And if you have a small trading account (under $25K), I’ll teach you all my tricks and how to beat the Pattern Day Trader Rule.
Heck, if you’re a client of mine, you are already on the right path… Just trust the process.
(Want to know more about my trading system and how I can help? Click here to find out more)
That said, most people who do try to trade penny stocks alone will fail.
- They don’t understand catalysts.
- They can’t tell the difference between a breakout and a FOMO trade.
- They let greed get the best of them and let their profits disappear.
- They fumble their entries and exits nearly every time.
I could keep going, but I think you get the picture.
That said, I’d like to talk about one of the pitfalls that is holding traders back. And it’s their execution.
I see it all the time, two traders getting into the same trade, one wins on it, the other loses.
That said, I’m about to teach you how to improve your entries and exits better so you can avoid getting stopped out as much and paid more often.
It will also help you from trying to catch falling knives and chasing false breakouts.
You’ve probably heard of my mentions of how powerful moving averages can be for entries and exits.
Well, not only do I like to use moving averages for entries and exits… I also like to use the Fibonacci retracement.
You see, I’m all about optimizing my strategies and focusing on hitting consistent 10% – 20% winners to build my account… which are both two factors in my 5 Step Trading Plan for Small Accounts.
So as I’m refining my strategies, I wanted to go over the Fibonacci retracement with you because it can be helpful, especially when you’re trading penny stocks.
How to Use the Fibonacci Tool
With the Fibonacci retracement tool, a lot of traders use it by drawing it after a stock has moved higher… trying to look for spots where they could potentially buy the stock on the pullback.
Now, you can also use the Fibonacci retracement tool for when a stock has dropped significantly as well… it might help give you resistance levels on the way up.
For example, yesterday the SPDR S&P 500 ETF (SPY) had a big move, and we’ll use this as an example.
(I taught a lesson on the Fibonacci retracement yesterday… if you want access to videos like these, click here to get started)
Now, the key levels to watch here are 38.2%, 50%, and 61.8%, and high of the day.
Notice how SPY is trading in a range and staying above the 38.2% level. Well, what that tells us is there is some support there, and it could be a good level to buy.
For the most part, what you can do is try to buy as close to those levels as possible, but what happens if the stock or ETF doesn’t pull right into the level and you don’t get an entry?
Well, you can wait for the high of day break… in other words, if the stock breaks above its highs… then you might look to buy.
What I like to do is focus on 38.2% and 50%…
You see, if the 38.2% level holds, there is a higher chance of the stock running higher.
However, if it pulls into the 50% level… the 38.2% level actually becomes resistance.
Now, let’s see how you would use it for penny stocks.
Fibonacci Retracement Tool Example
Check out this chart in Yangtze River Development (YRIV).
(I regularly post video lessons about trading, and also provide video watchlists of stocks on my radar… click here to find out how to get those delivered to your inbox.)
Now, right out of the gate, this stock was up around 30%… hitting a high of 59 cents within the first five minutes.
If you don’t know, right around the open time is the most volatile… so you actually could’ve drawn the Fibonacci retracement tool as shown above.
So there were actually a few ways you could’ve played this. Let’s say you saw that the 38.2% was holding as a support level… you could’ve bought shares there and placed a stop somewhere below a key Fibonacci level (say the 50% level)… and looked for 10% – 20% on the trade.
If you bought around the 50% Fibonacci retracement level, you can use below the 61.8% Fibonacci level as your stop.
However, what happens if you miss the entries on the Fibonacci levels?
Well, what you could do at that point is wait and set an alert for a high of day break.
In other words, if YRIV broke above 59 cents, you would look to buy shares and sell it on the next rip higher.
You’re probably wondering, Jeff, why do you like using this tool so much?
As you probably know… penny stocks move fast, and it’s easy to get caught up in all the price action… and start to chase stocks and get bad prices.
With the Fibonacci retracement tool, you’re actually able to spot clear buy areas and remain patient.
For example, let’s say you missed out on the trade in YRIV altogether… well, you can draw the Fibonacci retracements to spot clear buy zones to develop a plan.
Check out the chart above, let’s say you want to buy right at the 38.2% level (around 59 cents)… and stop out below the 50% level (around 56 cents)… and take profits on the next break of recent highs.
You can actually plan this ahead of time with your entries, stops, and profit targets.
Now, if this is still a little unclear to you, make sure to check out my Stock Trading Starter Pack – in which I dedicate an entire section to technical analysis… or if you’re ready to get started and take the next step to build your account, click here to get started.