Wanna be an Elite Trader? Read This.
Dear Penny Stock Millionaire,
Trading penny stocks ain’t easy! It’s why there are way more traders that get in and go broke than successful long term traders like me and my top students.
The key to being a successful trader, isn’t just one thing, there are a bunch of moving parts. That said, one of the big things you need to learn is how to recognize and trade based on patterns that occur in the stock market.
Patterns are part of what let traders look at in their technical analysis to predict where the price of a stock is going to go.
Chances are that if a pattern has occurred in the past, it will happen again in the future, and if you can correctly identify the pattern that happening, you can turn that into some cash.
Yesterday, I told you about 2 patterns you need to be on the lookout for, today, I’ll go over 2 more, and dive how to incorporate them into your trading plan.
Flags are pretty easy to see because the initial price movement — the trend — is steep. This flagpole is followed by the flag which usually slopes in the opposite direction. After the flag, the trend continues.
Another thing you might notice with flags: price action on the breakout or breakdown after the flag is similar in range to the movement before the flag. For example, if the flagpole is a rise of 20 cents per share, then after the consolidation it would be reasonable to expect another movement of roughly 20 cents.
This is important because it gives you some idea of possible entry and exit points. It helps you plan your trade and know how to cut losses quickly if the trade goes bad.
Example of a Flag Continuation Pattern
In the Cara Therapeutics, Inc. (Nasdaq: CARA) chart below, the flag continuation pattern is a clear consolidation moving the opposite direction to the trend. Notice how the continuation after the flag is practically identical in height/price range as the original flagpole.
CARA 2 minute candlestick chart: Flag continuation pattern
There are a few varieties of continuation patterns in a triangle shape. The triangle can be symmetric or asymmetric. It can be sloping up or down depending on the trend. Sometimes they’re called pennants.
Example of a Triangle Continuation Pattern
Check out the New Age Beverage (Nasdaq: NBEV) chart below. The downward trend is broken by the triangle shaped consolidation period. This one is pretty obvious. The key point to understand is that during the consolidation period, the highs and lows begin to converge.
NBEV 2 minute chart: Triangle continuation pattern
Key Tips for Coming Up With Your Continuation Patterns Trading Plan
Number one on the list when it comes to trend continuation patterns: they all trade in a similar manner. What I mean by that is, even though the shapes are different, they are all consolidation periods that interrupt the trend.
The different shapes might provide you with expectations about entry and exit points. But the idea is the same.
One more thing: The shapes aren’t always perfect. Don’t force the trade if the shape looks off! It might not be a continuation.
At the same time, you don’t have to wait for the perfect symmetrical triangle or rectangle to appear on the chart. You might be waiting forever. Better to understand the psychology of what’s happening — the opposing buy and sell forces at play — and then use that to your advantage.
Once the period of consolidation happens, look for confirmation of trend continuation.
It doesn’t matter if you’re planning your trade around bullish or bearish trend continuation patterns or some other pattern; your trading plan must have entry and exit points, stop losses, the reason you think the stock will behave the way you hope, a news catalyst …
… and more.
You need to plan every trade this way. My student Tim Grittani has page after page of spreadsheets with every detail of every trade he’s made or planning to make. That’s why he’s my most successful student: he makes a plan and then executes it.
Don’t Trade Too Big
You don’t have to be making money all the time. You don’t have to be trading constantly. I suggest you learn to trade less and profit more.
Here’s another one: You don’t have to trade big to build your account up. To be clear, you shouldn’t try to trade big until you have a lot of experience. There’s no point! Would you try to learn anything else in life by going big right from the beginning?
Trading big when you’re not ready only puts you at greater risk. Instead, work on making small gains and if you take losses make them as small as possible. Learn how to trade by trading small. My number one rule for trading is learn to cut losses quickly. It will save you a lot of money and heartache if you don’t hold a loser, hoping that it will turn around and watch the trade spiral further and further down the drain.
Small Gains Add Up Over Time
This is one of the most beautiful things about trading penny stocks. You can educate yourself. Focus on training. Study up. Then you can start by trading small positions and build up your account over time. They add up.
The more small gains you get over time, the more experience you’ll have. Then you can consider taking larger positions. But for now, trade small and win as often as possible.
Make lots of small gains. Make a trading plan. Stick to your plan and then cut losses quickly. Learned to let your winners run and other trading strategies to take profits along the way. These are all essential skills I teach my students. You can learn them too if you’re willing to put in the time and stay dedicated.
Don’t Trust Promoters
These guys are straight-up scam artists. Don’t chase trades. Don’t let your ego get in the way. Don’t be jealous of other traders. And don’t trust promoters. They don’t have your best interest at heart. They promote stocks so the price will go up and then they dump to take profits.
It’s widely reported that 90% of traders fail. And one of the reasons many fail is because of these scam-artist promoters. Steer clear!
Don’t Trade Without the Right Knowledge
I’m shocked sometimes when I hear about newbie traders trying to teach people to trade. They think because they’ve turned a couple thousand into $10K that they’ve arrived and are ready to teach.
I’m nearly as surprised when I hear about some newbie blowing up an account because they have no idea what they’re doing.
I shouldn’t be surprised any longer because this story happens over and over.
Stop. Focus on your education. Study up.
You want to learn to recognize and trade continuation patterns? Study.
Gain Knowledge First
The vast majority of traders lose. I think my rules and patterns give you a significant advantage. I teach my students to think differently. Pretty much every year since I started I’ve been profitable. Sure, I have losses (who doesn’t?), but they aren’t much. And when they happen, most of the time it’s because I’ve broken my own rules. The lesson to be learned: Gain knowledge first.
Don’t Trade Without Practice
This should seem obvious, right? I still have to mention it because I’ve seen some crazy things. Somebody comes along, watches a few videos, learns to recognize one or two patterns and then starts trading live. With real money.
This is the kind of action that ends in tears. Why would you trade with live money when you can practice first? This isn’t rocket science; it’s a learnable set of skills and body of knowledge. But it takes practice, it takes effort, and it takes dedication.
Before you put your money at risk, set yourself up on a platform that allows paper trading. There are tons of great platforms that will let you paper trade. Do a little research and select one to hone your skills, before you start trading with real money on the line.
The Bottom Line
Learning to recognize continuation patterns is foundational information. Take these four we’ve talked about and go find some examples. They don’t have to be perfect, but you need to be able to see them pretty clearly.
Start building your foundation. Right now. Here are a few things to do every day: Build a watchlist. Make a trading plan. Keep a trading journal. Look for patterns.
I’ll leave you today a quote I tweeted yesterday.
Editor, Penny Stock Millionaires