Financial Confessional: “I Day Trade Penny Stocks”

by J. Money - Published January 29, 2019

stock bull statue

Our Financial Confessionals are back! Here’s the latest from a guy who not only day trades, but day trades penny stocks 😱

Not a post you’ll typically see on this blog since I’m a huge buy-and-hold/index guy, but as promised earlier in the year, I want to be better about sharing other perspectives and strategies out there… Plus, some of his “rules” here are actually pretty good no matter how you invest!

So please enjoy today, a note from a fellow reader of this blog, “Brandon”, who shares his experience with day trading as well as why he loves a newer investing app on the scene over Robinhood.

Links to previous Confessionals can be found at the bottom of this post…

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I’ve Been Day Trading For 3 Years

So, day trading initially was a rocky start, meeting every expectation that you’ll hear about them: DANGER DANGER DANGER! Hah.

When I first started I had a major loss, so I went back to do more research and build my knowledge of how people make money on these things. A few books later, and a golden set of rules that I continually abide by, I now average 1-2% gain on my portfolio each day I trade…

Biggest loss: 84% of original portfolio ($2,000) after becoming too attached to a company called MoviePass — Big lesson learned here was not to fall in love with these stocks!

Biggest gain: 231% on a company called AXSM -> after a drug trial achieved its primary endpoint towards FDA approval.

I specifically look for news items pre-market, and then have automatic alerts pushed to my phone from an application called Thinkorswim. These alerts will filter any news items or SEC filings for a watchlist I create. I begin by looking for stocks that are due for news or have had significant runs in the past, and then once I have that list set up, I’ll get an alert, check the chart to confirm volume is coming in, and then enter that stock…

My golden set of rules:

#1. I keep emotion out of it. You have to avoid becoming attached to a stock, or the idea of a stock based on its business model or possible FDA approvals etc. as I learned early on.

#2. I always have an exit strategy. This is where having a cash account that allows day-trading like with the Webull app is king. Using this strategy you can enter and exit a stock the same day without the risk of being marked a “pattern day trader” and having your account locked, or worse closed per the SEC rules. A lot of people starting out will buy a stock, and if they have a margin account (default for the Robinhood app) they may not have a day trade in order to exit that stock… So they’ll hold overnight possibly risking further loss or bad news being released the following morning.

#3. I set acceptable loss and gain goals. I aim to gain 5-7% on any entry to a stock, and  calculate the price it would have to reach in order to obtain those goals. Then I watch.. Once it hits that price I exit – no emotions, no “coulda shoulda”. When it hits, 5-7% gains I exit. This is in my personal opinion where a lot of people go wrong. They hope for that rocket that reaches 60-80% and hold just long enough for it to erase any gains at all… For acceptable losses, I usually mark this between 3-4% depending on the size of the position I enter. Once it hits that mark, I also exit. This is extremely important to avoid any huge losses because these stocks will drop FAST.

#4. I review trades each day. I’ve developed a habit of going back and looking at all the trades I made that day, and determining if there was something I could have done better in executing those trades… If there was a loss, was there something I didn’t see that I could look for in the future? Did I make a purchase too close to an earnings release? * ALWAYS RISKY WITH PENNY STOCKS * I then take those findings and incorporate them into my planning for future trades.

#5. I’m not afraid to take a day off. Just because you have money in an account ready to go to work for you, doesn’t mean you should make a trade… Like on days President Trump puts out a tweet regarding the trade war. Usually a good day to take off from the market, as even good news won’t respond normally!

#6. I never enter a position with more than 20% of my total portfolio value. You’ve heard the phrase “don’t put all your eggs in the same basket” right? The same goes with day trading. If you drop the basket, all your Benjamins get crushed, haha…

How I fund my portfolio: I take 20% of my after tax paycheck and divide it two ways: 10% into a standard savings account (2.2% interest w/ Ally Bank), and then 10% into my Webull portfolio funds. Half of that portfolio then gets divided into long-term positions, and the other half towards day trading and highly volatile stocks. So basically 5% of my after tax money goes into day trading, which accounts for 25% of my overall saving/investing.

Resources: I love to read, and I’ve read all of the suggested books you currently have up on Budgets Are Sexy… In addition, I went out and purchased “Penny Stocks for Dummies” which details all the negative and positive catalysts for a movement on these stocks. It also touches on fundamental analysis as well as technical analysis. In addition to that, I read “Candlestick Charting for dummies” which was a HUGE help getting my mind wrapped around which way a stock will go, if it’s reached its max on the current catalyst, or if its oversold and starting to uptrend.

However, the most beneficial resource I found was a Facebook group called “Penny Stocks w/ Webull & Robinhood for Beginners“. Typically these groups tend to be very toxic, however this particular group is run by a single admin who runs an alert service (similar to Mad Money Jim Cramer’s alerts) but the group is 100% supportive with a zero tolerance policy towards bullying, stock pumping, and referral link spamming. In this group anyone who asks a question is treated like a team member, and actively works to increase each other’s knowledge and strategies.

My Cash account strategy: I set myself up in order to enter no more than 5 positions in a single day. Therefore, I take my total portfolio value and divide that by 5 (# of trading days) that will give me the amount I am able to trade each day… I then divide that number by the number of day trades I wish to make, giving me the amount of cash I can use for each position. Of course I can tinker with it and allow 3 small entries and 2 large ones if I wanted for that day, but I keep it simple by just dividing by an even 5.

All together since I’ve started day trading again I’ve contributed about $5,000 and I’ve turned that into $12,560.

At the end of the day, if someone randomly came up to me and asked what I thought of trading penny stocks, I would tell them it’s not for everyone. However if you have a set of rules you follow and always continue to improve your process, there’s money to be made.

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EDITOR’S NOTE: None of this makes me personally want to go out and start day trading anytime soon (don’t even have the time for it if I wanted to! haha…), but I will say that if you re-look at those “rules” up there, they’re actually pretty applicable to *normal* investing too: knowing your limits, not putting in too much where you regret it later, reviewing past actions to improve future results, knowing the end game!, etc. So I will say out of all the day trading stories I’ve heard over my lifetime, this one is much more focused and strategic which I appreciate ;) So thanks for taking the time, Brandon!

Oh, and then here are his notes on why he switched to the Webull investing app after using Robinhood for two years and getting frustrated. I haven’t poked around it much myself yet, but it does look promising and can be used regardless of how you like to invest.

**There are no affiliate links to any of these apps or other items in the post, FYI, outside of the Amazon books. I’m just linking them here for quicker access for anyone interested in perusing further**

Pros to Webull:

  • Commission free trading!
  • Longer pre-market and after-hours trading (also free). Webull’s extended hours are 4:00am-9:30am and 4:00pm-8:00pm, compared to only 9:00am- 9:30am and 4:00pm-6:00pm w/ Robinhood.
  • They have a paper trading system built right into the app for those still learning the way to trading
  • They give you cash accounts! Cash accounts take a little bit of planning and dedication, but with them comes the ability to day-trade more than three times a day without being locked out
  • They do awesome promotions. During Christmas season they offered a $100,000 give away split between those members who collect “cards” by participating in the app’s various features… which resulted in me getting a nice $78 contribution
  • If you refer a friend they get a free stock for signing up, and after an initial deposit they get another free stock
  • More advanced features than Robinhood like better technical analysis options, including Bid and Ask analysis, news and press releases as well as fundamental analysis.

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Previous confessionals told over the years:

[Bull photo cred: Sam Valadi]

Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!

{ 13 comments… read them below or add one }

1 J Khristov January 29, 2019 at 8:06 am

Excellent read! Very refreshing to hear you NOT talk about index funds for once! haha. are there any other books you recommend on the subject?

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2 J. Money January 29, 2019 at 9:43 am

Haha I know – I’m a one-track mind w/ those indexes..

Here are the books Brandon recommended above which seemed to do him well (I’ve never researched researched or played around with it myself):

Penny Stocks for Dummies” which details all the negative and positive catalysts for a movement on these stocks. It also touches on fundamental analysis as well as technical analysis.

Candlestick Charting for dummies” which was a HUGE help getting my mind wrapped around which way a stock will go, if it’s reached its max on the current catalyst, or if its oversold and starting to uptrend.

“However, the most beneficial resource I found was a Facebook group called “Penny Stocks w/ Webull & Robinhood for Beginners“. “

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3 Eric @ Flip n Finances January 29, 2019 at 10:04 am

These are some really good principles for regular stock investing as well – don’t put all your eggs in one basket.

I’ve only ever bought one “penny stock” in my life. I doubled my money in a week and make a couple hundred bucks. Now I’m definitely more into the VTSAX life (thanks J!) and I do have a little Google stock since I’m such a millennial ;)

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4 J. Money January 29, 2019 at 10:45 am

Haha, I like it…

I don’t remember ever buying a penny stock myself, but I did used to buy the next “hot thing” I heard all over the news when I first started…. I remember picking up Sirius satellite radio even though I had no idea what it really was or why I should buy it haha… Ended up losing on that one because of course I tried timing the market and failed miserably :)

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5 Mr. SoS January 29, 2019 at 3:18 pm

J$:

One thing I do is only invest and trade in companies that I understand and research. This helps avoid most losses. The market can always throw you for a loop, but research pays off.

Mr. SoS

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6 J. Money January 30, 2019 at 9:53 am

I’ll second that one, good sir.

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7 Super January 29, 2019 at 11:26 am

Nope. If he averages 1-2% per day (1.5%), then he would have had a 100X gain on his initial investment in a little over a year. In 3-5 years of trading, he’d have over $25M from an initial $1,000 investment. BS.

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8 Mr. SoS January 29, 2019 at 3:33 pm

Super:

I bet he means 1-2% per day on his trade for the day and not on the total balance. Once he begins to trade with a more sizeable amount of money he will no longer be able to trade penny stocks as each of his trades have potential to move the price of the stock and the options along with it.

Mr. SoS

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9 Brandon January 29, 2019 at 7:16 pm

Hi there Super, thanks for the attention to detail!! Let me make some clarifications here: After my initial loss I took some time off and hit the sheets – paper trading that is! While doing that I did my research and tried to figure out where I went wrong, and how I failed so miserably.

Fast-forward to January of 2018: I jumped back on the horse with a portfolio value of $1000 and began contributing $160 dollars every two weeks going forward. Typically one could expect a much faster gain with 1-2% increases in value, however to clarify I do not trade every day. I am not a career day-trader, I’m an average Joe who works 5 days a week of which 3 are at home. On those days I spend the mornings filtering and searching for news items that may positively influence stock value. If I don’t find any, I take the day off and begin my day’s work a little early. Which is why Rule #5 is so important as it prevents you from forcing a trade that may not be in your favor.

I can see the misconception because if I were trading 5 days a week maintaining those 1-2% gains each day I would reach my current value in only 7 months. However this is calculated using a standard compounded interest formula with a $160 contribution every two weeks. It does not take into consideration the days I am heavy red, or the opposite. Example I may grow 20 days around 1-2% but if I have one trading day where I lose 15% it will heavily impact my overall value but not significantly impact the daily gain average. Thus the problem with averages versus medians. If I had to take a guess I’d say median growth is around 0.4% however my trading platform doesn’t automatically calculate that.

Let me know if this clears everything up or if you have any other questions!

Brandon

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10 Mr. SoS January 29, 2019 at 12:48 pm

J$:

I have a confession to make. I occasionally trade weekly options. I started trading a couple years ago and I have learned a great deal in that time. I only traded through June last year in my cash brokerage before I cashed it out to pay debts. During that time, I made $161.39 after fees and commissions. Besides wanting to pay down debt, I stopped trading in my cash brokerage because my accountant told me I was barely breaking even after short-term capital gains taxes. Anyone looking to trade daily, weekly, or even monthly, should check with a tax professional to make sure they understand how their trading will affect their taxes.

Now I only trade within our IRA and Roth IRA accounts. You do not have to pay capital gains taxes on your trading. You will eventually pay taxes when withdrawing from your IRA, but will never pay taxes on your gains from your Roth IRA. I had quite a bit more capital to use, but last year I made $46,227.35 after fees and commissions. This was part of the reason our net worth was up for the year while much of the community was down for the year. I briefly spoke about these trades in our net worth posts each month.

Like Brandon, I use ThinkorSwim for charting. I agree that any options trader should have a fundamental understanding of candlestick charts. I have not read his book recommendation, but I suggest searching for and reading the information about candlestick charts on Investopedia.

Trading options takes discipline and it is incredibly difficult to keep emotions out of your trading. I believe emotions are the reason most people lose money in the markets. You have to have trading rules and you need to follow them. Brandon’s rules are very good. These are similar to rules described in a book I read a couple times called Trading for a Living: Psychology, Trading, Tactics, Money Management by Dr. Alexander Elder.

Ultimately, you need to learn from your mistakes so that you can end up earning money rather than losing it. Trade with a paper account before you trade with real money. Create rules that fit your style of trading. When you find a technique that works, utilize it and update your rules as you learn and as the market changes. Eventually, you may find that you too can be a trader.

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11 J. Money January 30, 2019 at 10:02 am

Love the insight brother, thank you!

And appreciate the book rec as well – I went and edited in a link directly to it so others can find it faster…

Funny you mention taxes too. As lame as it sounds, it’s a principal reason it took so long for me to finally open up a non-retirement brokerage account myself. I just low how easy and simple it is trading in retirement accounts and never wanted to mess with the tax side of things in normal brokerages!

But finally sucked it up last year when I had an influx of money I no longer wanted to sit in savings and def. glad I am (although I lost most of the profit already due to the market lately, haha….) And since I use an accountant it’s not terribly annoying – I just have to remember to get the proper paperwork each year going forward!

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12 Mr. SoS January 30, 2019 at 4:17 pm

J$:

A cash brokerage account is a great way to increase your extra savings. As long as you buy and hold you do not have to worry about additional tax liabilities. The other thing is that if you purchase on a regular basis, you can always take withdrawals to work the taxes to your advantage. We used to do this with our previous Employee Stock Purchase Plan.

As for the market, just like you told your better half last month, you are in it for the long haul. Warren Buffett says you should bet on America and you will never go wrong following his advice.

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13 J. Money February 1, 2019 at 6:44 pm

And even better when you really do love America! Which I do! :)

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