Jasmine Birtles
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The Underbelly and Upside of Penny Stocks with Veteran Trader Zak Westphal
Moneymagpie Team
27th May 2024
When you think about high risk investments, what springs to mind? Crypto? IPOs? While those certainly do come with their own share of thrills and and spills, one asset class has become notorious for its volatility and somewhat dubious reputation: penny stocks
For many people, they solely envisage penny stocks and pump and dump schemes or bottom of the barrels businesses that would feel like something of a crapshoot to invest in. However, veteran trader Zak Westphal begs to differ.
After spending more than a decade mastering the penny stock markets, Zak has gone on to build one of the fastest-growing and highly-rated trading platforms in the world, StockToTrade. Defined as shares trading under $5, Zak Westphal argues there are sustainable ways to day trade pennies responsibly using the proper diligence and risk management strategies that saw him turn a consistent profit.
Intrigued to unpack the penny stock world further from an expert lens, we sat down with Zak to discuss his experiences navigating these turbulent waters day in and day out.
For people newer to markets, explain what makes penny stocks fundamentally different from higher priced stocks? What unique mechanisms are at play with pennies?
For sure, when you compare pennies to blue chip stocks like Apple, they might as well be different animals entirely. First off, penny stocks refer to the shares of extremely small, early-stage companies without much operating history to evaluate like revenue, profits, etc. They’re young startups essentially. Now on top of that, pennies often trade over-the-counter on exchanges with way more lax regulations and reporting requirements compared to major exchanges like the NYSE or NASDAQ.
This means pricing and volume action becomes driven more by crowd psychology, message board hype, and opportunistic trading maneuvers rather than intrinsic value or fundamentals. And you’ll see a lot more extreme price swings with pennies based on fast-spreading rumors, light trading volumes allowing for manipulation, and predatory short selling schemes trying to capitalize on retail traders. It’s basically the Wild West out there compared to more mature blue chip stocks. Much faster paced and higher risk for sure.
With that landscape, what specific analysis or indicators have you found most useful over the years for timing entries and exits with penny stocks?
With penny stocks, technical analysis has to be the priority for me rather than traditional valuation metrics or fundamentals. First thing I do is look at volume and relative volume indicators closely to gauge genuine interest and tradability. I want to verify whether a penny actually has enough eyeballs on it to warrant a swing trade. Then I’ll study the Level 2 market depth and intraday movement of key support/resistance zones.
I’m looking hard to identify clear catalysts tied to news events or technical signals that could ignite a breakout. Once I spot a high probability setup, I’ll optimize my entries around defined support levels with exit points ready at logical resistance zones. Adaptability day-to-day is crucial as well – don’t get attached to one strategy as headline volatility causes prices to swing aggressively intraday. Pennies will definitely keep you nimble.
Now for traders assessing pennies, what do you personally look for in the price action before pulling the trigger?
For me, I don’t solely trade the technical chart patterns in a vacuum – I trade the momentum and reliability of the price action itself. Sure I want my usual checklist…volume confirmation on a breakout, identifiable intraday support/resistance levels holding firm, consolidation leading into a surge.
But most importantly, I want to detect an inherent swing trade mechanism in the penny itself – some kind of repeating, tradable volatility pattern setting up an exploitable trade. Maybe it spikes hard at open every day this week, then bleeds out midday, only to climb into the close. Rinse and repeat. Or it bounces between a very clear price ceiling and floor every few days as algo traders play off technical levels. If I spot those momentum swings, I’ll trade around the edges of them until the pattern changes. It’s not always clean textbook setups – you have to detect the deeper price action DNA to time entries/exits well with pennies.
Now for traders just wading into pennies, what bad habits have you seen newbies pick up early on that sabotage them?
Easily the most dangerous habit I see is overtrading right out the gates. Rookie traders discover these extremely volatile penny stocks that only cost a few dollars per share and start swinging for the fences without solid risk management in place. Just because you can buy a couple thousand shares of a $0.50 stock doesn’t mean you size up like that instantly. Define reasonable position sizes early on and stick to them until consistency is built.
Also best to avoid getting emotionally invested in any penny stocks themselves or attached to compelling stories their CEOs spin about “disrupting” various industries. Assume there are likely ulterior motives driving prices rather than fundamentals or initiatives paying off. Take quicker profits once buying momentum stalls or volume dries up instead of hoping for more. And overall, keep a healthy skepticism about the integrity of pennies rather than blindly trusting chart patterns or hype. Plenty of traders out there trying to take advantage of retail excitement around earnings, takeovers, etc. Business as usual in penny land!
Final question – if you could only master one single aspect of trading penny stocks, what skill would have the biggest impact on trading performance?
If I could only master one thing around trading penny stocks, it would have be managing my trading psychology itself – specifically combating irrational biases. The volatile, loosely regulated nature of pennies activates all sorts of mental traps like confirmation bias, loss aversion, overconfidence after wins.
Traders marry positions emotionally, hesitate exiting confirmed losers, revenge trade more aggressively after losses – very destructive habits. However, if you maintain disciplined risk management rules, stick to defined parameters for entry/exit, and ignore compelling narratives or excitement around positions, you vastly improve profitability regardless of any other skill. Psychology influences all behaviors and decisions as a trader. So mastering those irrational biases and emotion-based impulses pays major dividends long term rather than just analyzing price action momentum.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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