The age old question: Nature or nurture?
In mid-1983, famous commodities speculator Richard Dennis was having an ongoing dispute with his long-time friend Bill Eckhardt about whether great traders were born or made. Richard believed that he could teach people to become
great traders. Bill thought that genetics and aptitude were the determining factors.  In order to settle the matter, Richard suggested that they recruit and train some traders, and give them actual accounts to trade to see which one of them was correct.

They took out a large ad advertising positions for trading apprentices in Barron’s, the Wall Street Journal and the New York Times. The ad stated that after a brief training session, the trainees would be supplied with an account to trade.
Since Rich was probably the most famous trader in the world at the time, he received submissions from over 1000 applicants. Of these, he interviewed 80. This group was culled to 10, which became 13 after Rich added three people he already knew to the list. We were invited to Chicago and trained for two weeks at the end of December, 1983, and began trading small accounts at the beginning of January. After we proved ourselves, Dennis funded most of us with $500,000 to $2,000,000 accounts at the start of February. “The students were called the ‘Turtles.’ (Mr. Dennis, who says he had just returned from Asia when he started the program, explains that he described it to someone by
saying, ‘We are going to grow traders just like they grow turtles in Singapore.

The Turtles became the most famous experiment in trading history because over the next four years, we earned an average annual compound rate of return of 80%. Yes, Rich proved that trading could be taught. He proved that with a simple set of rules, he could take people with little or no trading experience and make them excellent traders. Continue reading. The complete set of the rules that Richard Dennis taught his trainees is attached.

turtle

The Complete TurtleTrader: The Legend, the Lessons, the Results

The first question that needs to be answered is… what is a penny stock? On the surface, it appears to be a simple question, with a simple answer… stocks that trade for a penny. However, there is not a definition that is adhered to by all. The Securities and Exchange Commission (SEC), in April 1992, defined penny stocks as shares of any company trading for less than $5. This would make such well-known companies as, E-Trade Financial and Sirrus Satellite Radio penny stocks, since they trade below $5, even though they have market capitalizations in the billions! Additionally, the definition includes any stock that is not traded on a national securities exchange or quoted in the NASDAQ list maintained by the National Association of Securities Dealers (NASD). By this definition, companies such as Nestle (NSRGY), which trades at $119 per share, would be considered a penny stock, because it trades on the pink sheets as an American Depository Receipt (ADR). Furthermore, when the SEC discusses microcap stocks, a term often used interchangeably with penny stocks, it isn’t much clearer. It states that the term “microcap stock” applies to companies with low capitalization, meaning the total value of the company’s stock. Microcap companies typically have limited assets. For example, in cases where the SEC suspended trading in microcap stocks, the average company had only $6 million in net tangible assets – and nearly half had less than $1.25 million. Microcap stocks tend to be low priced and trade in low volumes. Again, there is no accepted definition, for this article we will define a penny stock as any stock that trades under $1, regardless of market capitalization or exchange.
Once you have decided to invest or trade in penny stocks the first step in your due diligence process should be to determine what exchange the stock is being traded on. Using a very broad definition, penny stocks can be put into two categories, they are small/new/growing companies, such as Advanced Battery Technologies (GBT), which traded on the OTCBB at $0.71 per share in late 2006 and now trades on the AMEX at $4.78 per share, and well-established companies on their way down. The most notorious example of a high profile company on its way down is Enron (ECTPQ), which amazingly still trades at $0.01 per share on the pinksheets. There are many examples of companies that trade on the NYSE and the NASDAQ whose stock trades at or below a $1.00, these companies should be avoided like the plague, as they are companies in deep trouble. The NYSE and NASDAQ both have requirements regarding stock price, therefore companies trading at those levels, on those exchanges are on the verge of being de-listed. There are two other venues, in the United States, where penny stocks are traded; they are the Over the Counter Bulletin Board (OTCBB) and the “pinksheets”. The main difference between the OTCBB (www.otcbb.com) and the pinksheets is as of July 2000 all OTCBB stocks are required to file financial reports (e.g., quarterly and annual reports) with the SEC. Pinksheets (www.pinksheets.com), called that because of the color of paper the quotes are printed on, are like the Wild West; these companies are NOT required to file with the SEC, although many of them do. Since, companies are not required to file documents with the SEC on the pinksheets it becomes extremely difficult to obtain information regarding the financials of the company and when you do find information, you should question their accuracy. Since companies are required to file financial documents on the OTCBB, it is recommended that your penny stock picks be limited to those listings.
TIP: Find a stock that is traded on the OTCBB.

Step two on your due diligence checklist should be: What is the company’s ticker symbol? Stocks that are traded on the OTCBB usually have four characters; however many times you will notice stocks with a fifth character in their symbol (see chart). Symbols with five characters are not an inherently bad thing, however, there are a two fifth character symbols that should be major red flags when selecting a stock, and they are the symbols E and Q. A ticker symbol with a fifth character of “E” (e.g. WXYZE) indicates the company is late filing their required reports with the SEC. This should tell you the company is run poorly, as filing with the SEC is important and should be a priority if the company is serious about attracting investors. Additionally, there is a good likelihood the company is experiencing financial problems. It should be noted that once the company files the required documents the E is dropped from the stock symbol. The other symbol that is a major red flag is Q. Any company with a fifth character of a Q in their symbol (e.g., WXYZQ) is in bankruptcy. While there are examples of companies emerging from bankruptcy and the stock doing well, it isn’t normally the case. Take a look at many of the dot com stocks that ended up going bankrupt. Many didn’t emerge or their stock became worthless.
TIP: Do not invest in companies whose symbol ends in E or Q.
Now you have determined that the stock is traded on the OTCBB, is current with their financial statements and not in bankruptcy – a good start. It is now time to start delving into the nuts and bolts of the company. The best way to do this is to start reading the latest quarterly report. You can find quarterly reports via Yahoo! Finance. Your first stop in the report should be to determine if the company has a “going concern” statement in their report. An independent auditor that states there are reasons to believe that the company is not going to be able to maintain itself as a viable business writes a going concern statement. It will read like:
“The report of independent auditors on the Company’s December 31, 2006 consolidated financial statements includes an explanatory paragraph indicating there is substantial doubt about the Company’s ability to continue as a going concern.”
TIP: Do not invest in a company with a going concern clause in their financial statements.
The next step is to start figuring out what the company does. My recommendation is to stick to companies you understand. For example, when I read quarterly reports of pharmaceutical and genetic companies, they make no sense to me because I don’t understand the science of the company to know if what I am reading is good, bad or indifferent, so I never invest in those companies. In the annual or quarterly report, you should read the profile of the company. This is management’s description of what the company does, its mission, what products they sell or service and what subsidiaries they have. This type of information is normally listed in the Managements’ Discussion of Operations. When reading the profile keep in mind that most successful companies focus on one type of business, such as PC’s, clothing retail, wireless access, etc. However, it is common in penny stocks to find companies that have revenue streams from two or more, very different sources. For example, the company Ad South Partners (ASPR.PK) is the combination of a beauty products company and an advertising agency. Their primary revenue stream is an advertising agency; however, they also market various facial and skin creams. While both may be good ideas and be profitable, rarely does an entire management team have expertise in advertising and beauty products.
TIP: Stick with companies whose business practice you understand.
TIP: Look for a company that does one thing and does it well.
The next topic could be the subject of many books, however for this article we are going to condense the financial statements down to looking at one number, earnings per share. With any stock, not just penny stocks the purpose of being in business is to make money, so try to invest/trade in companies that are profitable. There are many financial stock screeners on the Internet that can be used to find profitable penny stocks.

TIP: Pick a company that is profitable, there are plenty of profitable penny stocks.
A valuable source of information regarding companies are the news stories and press releases that are sent out. Take a look on Yahoo! or smallcapcenter.com to get a list of the recent news releases, read them all. In doing so, you will start to get a sense if the company is flourishing or if the company is struggling. Press releases also keep the stock on the “radar scope” of many investors. Also, look out for any red flags, such as the SEC sending a formal order to conduct an investigation on the company. While not a penny stock, a good example of the carnage that occurs when the SEC comes knocking on the door is Krispy Kreme doughnuts. The stock lost approximately 40% of its value once the SEC investigation became public information.

TIP: Pick a company that generates some press, it is likely to have more trading activity.
TIP: Do not invest/trade in a stock that is being investigated by the SEC.
Many penny stock companies hire investor relation firms to recommend the company stock to various media avenues. Very often, if you search the Internet for a particular company you will stumble upon a research report written by an investor relations firm. While many of these reports provide excellent information, their recommendation must be taken lightly. Generally, these companies receive large amounts of shares in exchange for the research report. Companies are required by law to disclose if they received shares. This information can be found in the disclaimer at the end of the research report. For example:

“The Buy Our Stock Service is a registered investment advisor that produces equity research reports. On September 24, 2007, in consideration for Buy Our Stock Service equity research services, including this report, the Company agreed to pay Buy Our Stock Service a fee of 500,000 shares of the Company’s common stock.”
Obviously, if you see a disclaimer like the one above you need to concern yourself with the objectivity of the report. Again, this is why doing your own due diligence is key.
TIP: Be extremely wary of research reports when the firm was paid in either cash or stock.
In the opening paragraph, I stated that my goal was to educate you on steps you can take to reduce your risk when investing in the speculative world of penny stocks. I hope that I have accomplished my goal by giving you nine “tools” (tips) for your investing “toolbox” that can be used when conducting your own due diligence. However, this is not a complete list; you can add additional “tools” to your “toolbox” by educating yourself. Educate yourself by reading Pennycents, company quarterly reports, penny stock websites, press releases and other financial publications. As mentioned earlier, investing in penny stocks is extremely risky, but with these “tools” and “tools” you develop on your own you are well on your way to reducing the risk.

Investing in Small-Cap Stocks REVISED Edition

Keywords: Pennystocks, OTCBB, due diligence, pink sheets, small cap stocks, microcap stocks

For example, on May 11, Trade King is hosting a webinar where Price Headley of Big Trends will discuss Finding Big Trends in Trading Stocks and Options.

Big Trends In Trading: Strategies to Master Major Market Moves

On May 25, Trade King is presenting Steve Nison who will be discussing the topic of how to Quickly Find High Probability Trades

Japanese Candlestick Charting Techniques, 2nd Edition

Interactive Brokers doesn’t bring in any big guns for there webinars, however they have put together a series of excellent courses, under their Trading University, that can be accessed by anyone, even if you don’t have an account with them.

• Trade King Webinars
• Interactive Brokers Trader’s University

Rule 1. Forget the news, remember the chart. “You’re not smart enough to know how news will affect price. The chart already knows the news is coming. “

I do not believe that the chart already knows the news is coming.  One has to look no further than Goldman Sachs on April 16, additionally the stock has continued to go down since that initial plunge.  Use the chart for entry and exit points, but not the sole basis of trading an equity.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.

Couldn’t agree more, as long as that first pullback represents resistance or a support line being broken.

3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.

Absolutely, learn to read charts so that you can understand where there is support and purchase at that price with your stop loss set just below the support.

4. Short rallies, not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

WRONG!  There is a saying in the market that stocks that make new highs continue to make new, new highs.  If you shorted the rally that started in March 09, you would have lost a great deal of money.  The trend is your friend, go with it!

5. Don’t buy up into a major moving average or sell down into one. See #3.

Agreed.

6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.

True. More often than not the market will whipsaw you the minute you make your purchase.  Occasionally, the stock will continue to run, but there will always be next time.  See #3, make your purchases at support.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.

I don’t agree.  I subscribe to the theory that all gaps will get filled.  If something gaps up, short it.  If something gaps down, buy it.

8. Trends test the point of last support/resistance. Enter here even if it hurts.

Yes, this goes back to #3. Just make sure you have your stop losses set at the areas below support.

9. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.

Absolutely, the trend is your friend.

10. If you have to look, it isn’t there. Forget your college degree and trust your instincts.

No, don’t forget your college degree because you should be basing your purchase on more than just your gut feel or what the chart says.  Please also look at the fundementals of the company.

11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

I have never tried this, but I like the idea behind it.

12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.

The trend is always your friend, don’t fight it.  It is like trying to swim in a riptide, you will lose!

13. Avoid the open. They see YOU coming sucker

For the most part I agree with this, however if a stock gaps up or down on the open, I would not hesitate to buy or short.

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

What?!

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

True.  I think you could say this about the 50 and 100 day MA also.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

Agreed.  In fact, you can make a lot of money on stocks that trade within a certain channel.

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

Agreed.

18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

Nope.  See Goldman Sachs on April 16.  News, good or bad can turn a stock on a dime.

19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.

Agreed.

20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

Agreed.  Don’t be greedy!

Again, these rules came for www.hardrightedge.com.  Go to their site, they have some great resources.  In fact, they have written an excellent book called the Master Swing Trader that should be a reference to anyone who regularly trades stocks.

The Master Swing Trader Toolkit: The Market Survival Guide

Master today’s Volatile Stock Markets – and profit in the years to come. With more than 50,000 copies sold, Alan Farley’s “The Master Swing Trader” has become the definitive guide for maximizing profit from short-term price moves. Now in his highly anticipated companion volume, “The Master Swing Trader II: The Market Survival Toolkit”, Farley builds on his proven strategies and techniques, and delivers new tips for consistently beating the markets – today and in the future. Steep market index fluctuations in the recent past have presented tremendous opportunities to investors – but to those with the right tools to take advantage. Farley uses real-world case studies to show defensive trading strategies in action, and offers prescriptions for prospering in the post-crash environment. However, this book isn’t just limited to post-crash investing, but shows how you can find new market opportunities with reduced risk to profit in virtually any economic scenario. Application-oriented – this title is filled with market-tested examples of defensive investing strategies in action. It offers rock-solid advice for winning in today’s markets and positioning yourself for future opportunities. It features sections on: cross-market analysis; convergence-divergence relationships; risk management; market profile (managing multiple positions); and, more.

MONEY MANAGEMENT

This is a topic that a plethora of books have been written about. The key to winning in the market is money management, this is a broad topic, however, some things you should incorporate into your trading strategy are: how much to invest on each trade, how much can I afford to lose, when to sell.

How much do I invest on each trade?

There is no set dollar amount that you should invest in each stock, but rather a percentage of your portfolio. Stocks are inherently risky, thus we recommend no more than 10% of your “speculative”portfolio in each stock. For example, an individual with $10,000 should NOT invest more than $1000 in each stock. Some financial planners would even say that is too much. However, you need to make sure you invest enough money to offset the commission charges (see limiting expenses).

How much can I lose?

BEFORE you purchase any stock, we recommend setting a mental stop loss of how much you can lose (e.g., $400) and then convert that into a stock price. For example, if you are going to purchase 1000 shares of XYZ at $20.00 and you can afford to lose $3000, you are going to set a mental stop loss of $17.00, meaning you are going to sell, NO MATTER WHAT, if the stock reaches $17.00. You can set stop losses with your brokers that will automatically sell the stock when it reaches that price. However, that allows everyone who is trading the stock to see you are going to sell at that price and it will get “picked off” and sold. Whether you set your stop loss mentally or systematically the key is to limit your losses. Nobody can pick winners everytime, however, if you keep your losses small you can afford more losers, if you let your winners run.

When do I sell?

BEFORE you purchase any stock, we recommend setting a mental sell price or how much you want to profit. Is it 20%, 50%, 100%. Whatever, the percentage stick to it and sell when you reach that point – execute your trading plan. Remember… “Nobody ever lost money taking a profit”.

Controlling Expenses

The entire purpose of investing is to make money, as in any business venture, one of the keys to maximizing profits is controlling expenses. Commissions can eat up huge amounts of profits, select your broker carefully and be sure to review all fees. Many brokers will charge a small amount for the commission, but charge you additional ECN fees which can add up quickly. Our advice is to calculate how much it would cost you to buy and sell various priced stocks with each broker.

Here is an excellent book on creating a trading plan and managing risk.

Trading for a Living: Psychology, Trading Tactics, Money Management, Study Guide

An eminent futures trader explores crucial factors in the markets that most experts overlook–time, volume and open interest–and describes little-known indicators to profitably track them. Covers all the popular technical approaches to futures, options and stock markets including Elliott Wave, oscillators, moving averages, Market Logic, point-and-figure charting. Explains why most traders sabotage themselves and how to avoid doing the same.