This site has some rules about investing in microcap/small cap stocks.
Use a stock screener to screen out undesirable stocks. A good example is to select stocks between market capitalization of 1 million to 300 million dollars, outstanding shares no more than 2.5 Billion.
Short term trading strategy I use. My Short Term trading system/stradegy
Important reading from SEC on microcap stocks http://www.sec.gov/spotlight/microcap-fraud.shtml http://www.sec.gov/investor/pubs/microcapstock.htm http://investor.gov/news-alerts/investor-alerts/investor-alert-don-t-trade-pump-dump-stock-emails#.VMcrES4bL5M http://www.sec.gov/oiea/investor-alerts-bulletins/ia_marijuana.html#.VOltcy4bL5N
Stay away from Microcap stocks where the corporation is overseas. Many of these turn out to be scams.
Stay away from Microcap stocks with DTC (Depository Trust Chill) status.http://www.sec.gov/investor/alerts/dtcfreezes.pdf
Check to make sure the lawyer, account, CEO don't have criminal backgrounds. Here are some good reasons to check them out http://www.sec.gov/news/pressrelease/2015-9.html#.VOl23y4bL5M http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540716442#.VOl2-y4bL5M http://www.sec.gov/litigation/stoporders/2014/33-9582.pdf
Make sure the company is not a fake company. If you can visit the company do so. Check to see if they have products.
Be careful about getting recommendations from friends and posts on stock sites, penny news letters. Make sure you understand the pump and dump game and realize that many times organized criminal gangs are involved in pump and schemes.
Set up a watch list to alerts for stocks your are thinking about purchasing.
Learn about positive expectancy. http://www.tradermike.net/2004/05/trading_101_expectancy/
Make sure you get the technical analysis analysis of the stock. There are several sites such as www.stockta.com , www.americanbulls.com, and www.stockcharts.com, http://www.barchart.com that will give quick technical analysis of the stock. Barchart is more accurate and gives out more technical analysis. Learn about trend reversals. http://www.candlesticker.com/BearishPatterns.aspx?lang=en http://www.candlesticker.com/BullishPatterns.aspx?lang=en
Understand the various chart patterns and what the probability of directions of of a pattern. http://thepatternsite.com/index.html
Read all documents for the stock on otcmarkets site. hhttp://www.otcmarkets.com/home
Study the historical prices of the stock. You can can get historical data for sub penny stocks from http://www.nasdaq.com. Try to find out why the stock crashed (dilution, pump and dump). Look at patterns in volume.
Get a good charting tool a highly recommended one is http://www.esignal.com look at weekly charts and 60 minute charts (useful for sub penny stocks). Understand what the different between resistance and support so you know when to get into the security.
Get your self an education on trading from sites such as http://www.claytrader.com
Read books such as these. http://www.amazon.com/Riding-Bear-Gains-Recognizing-Market/dp/1580621546 http://www.amazon.com/Stan-Weinsteins-Secrets-Profiting-Markets/dp/1556236832 http://www.amazon.com/Getting-Started-Technical-Analysis-Schwager/dp/0471295426
Read up on technical analysis. http://www.swing-trade-stocks.com/moving-averages.html
Read this about penny stocks plays http://investorshub.advfn.com/Triple-000-and-Sub-penny-Chart-Plays-23986/
Understand that penny stocks can have huge moves of 10% to 50% on days where favorable news comes out. It will be followed by a consolidation and or correction the next days. Sometimes people misinterpret the news and then realize it is about nothing and the stock crashes.
Understand there are on average about 10 penny stocks that go from subpenny/penny range to over a dollar out of the 5000 penny stocks available, they make millionaires every year. The rest of the other 4990 stocks get pumped and dumped and that is why people have to know their tolerance for risk and exit points.
Capital invested into a penny stock portfolio should not be more than 5% of your overall portfolio for initial capital investment. Start with small amounts of money to limit risk. Some times trading is halted for a few days or weeks. Sometimes SEC will shutdown a company because it is fake and you will loose all your money. I know someone who position was up $60,000 in a marijuana stock that turned out to be a fake company. He was not able to execute is trade before the SEC shutdown trading of the company. He lost all his initial investment and his gains, painful.
You can make money in bull and bear markets. Remember pigs got slaughtered. Take your profits when you can. Unless of course you really think the stock will go to a dollar (won't have with over dilution) Never short penny stocks. Here is an example of of short getting wiped out a few years ago. http://www.bloomberg.com/bw/articles/2014-07-24/cynk-the-6-billion-penny-stock-debacle-stretches-from-belize-to-las-vegas (It turned out to be a fake company SEC shutdown the company.
Read up on how to invest in bear markets. Understand the seasonal trading systems and market cycles during elections.
Make sure you know that the more shares you have to harder it is to sell. Try to sell into rallies. You will find most of the time microcaps are selloffs most of the time.
Never invest in a penny stock without earnings.
Understand a key sell signal Death Cross. That is when the 50 day moving average goes below the 200 day moving average. Sell as soon as you can. This is a safety measure used to limit risk.
Understand a key buy signal Golden Cross. That is when the 50 day moving average is above the 200 day moving average. Also if the stock continues to stay above the 50 day and 200 moving average don't sell it. Look for a flag pattern before selling.,
Be careful about what you read in the stock message boards and social media. Many people put out false information to drive down a stock to help them on a short position. Sometimes people will put out false information to pump up a stock. That is why is very important you do your on DD (Due Diligence) to make sure you are not investing in a fake company.
Consider the money you invest in penny stocks as monopoly money. Meaning it can all go away even if you try to control risks. Don't use your emergency funds, college funds, retirement funds for penny stocks. Ideally you should already have investments built up in mutual funds (index and managed funds) diversified (stock, money markets, bonds, real estate, sector).
Don’t invest during a bearish down trend unless near the bottom.
Don’t invest more than $100 if the prices is less than .001
Don’t invest more than $1000 if the prices is less than .01
Only invest if there are earning reports.
Be prepared for selloffs/crashes in March and Dec. Tax loss selling.
Only invest if there is a potential for earnings and revenue upgrades and possible upgrades to nasdaq stock exchange.
Always check the charts for historical patterns
If the stock is diluted or is about to be diluted wait until dilution is over before investing. Reverse stock splits are not bad if the stock is upgraded and the price is higher.
Set price targets for profit taking to at least get back initial capital investment.
Every year between sept to dec penny stocks decline. Look for candidates that can triple the money and put no more than 300 each in 10 positions. Try to pick shares where the price is no more than .004. Invest the money and unload when it reaches a penny or triples. First year you start out with
3000 First year goes to 9000 (each position 300)
9000 2nd year goes to 27,000 (each position 900)
27,000 3d year goes to 81,000 (each position 2,700
81,000 4th year goes to 243,000 (each position 8,100)
243,000 5th year goes to 729,000 (each position 24,300)
729,000 6th year goes to 2,187,000 (each position 72,900)
Understand who the pumpers and dumpers are on the investment boards and social media such as facebook and twitter. Many have an agenda and your profit taking is not in it. Many will say they are long but are flipping and bailing out the positions. Many will post positive comments on the board because they don't want to be banned. Take a look at the banned posters or posts that get removed. Save them because they have a lot of important due diligence that is taken from the 10-Q statements. If you ever wanted to find out why a stock is allways selling off you have you answer.
If you are concerned about taxes and really think the position is long term keep the position on a retirement account. In a tax account take your losses you can write them off against your gains. It is better to have a profit than to have dead money sitting around for a long time.
Anytime someone posts that technical analysis does not apply to penny stocks don't listen to any thing they say. They are another pumper.