The Framework Of An Afternoon Fade And Why It’s So Essential To Short Selling Penny Stocks
I was on Twitter for a second yesterday and a came across an interesting tweet from Timothy Sykes……
When shorting penny stocks, it’s so key to wait for these afternoon fades and ideally the taking out of the morning lows, remember this!
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An afternoon fade is one of a penny stock trader’s best friends when short selling penny stocks. It is one of my favorite short selling patterns because it’s VERY predictable.
So lets get to the basics: What is an afternoon fade? An afternoon fade is when a penny stock gradually (sometimes sharply) comes down off its highs of the day and keeps making lower lows for the day. Keep in mind we’re only looking for afternoon fades in penny stocks that are hyped, manipulated to 75%-300% gains in 1-10 trading days.
What happens is during the morning hours of trading there’s a ton a volume and volatility in these types of penny stocks because of news, hype, promoting, message board pumping, etc. Then what happens is by the afternoon time everything kind of calms down from the morning spikes and all that craziness and these particular penny stocks start trending gradually downwards because the momentum drains out and volume is lighter from that in the morning. A key to spotting an afternoon fade is when your targeted hyped penny stock begins to make intraday lower-lows OR goes below the morning lows – during the afternoon. Here’s a chart diagram that shows a picture perfect afternoon fade (from yesterday actually).
Afternoon fades are very predictable pattern to short because there usually just isn’t enough volume to turn up a penny stock turning downwards..traders just kind of go with the flow. Because of this its less risky because of the non-volatile factor. For you beginners just getting into or wanting to get into shorting penny stocks, I suggest you try to short these types of patterns first because it’s less risky. Then once you get your feet wet you can began to short this amazing pattern.
A Penny Stock’s Short Interest: What It Tells You
Short interest is the total number of shares of a particular penny stock that have been sold short by traders but have not yet been closed out or “covered”.
Short interest is calculated by dividing the number of shorted shares by the number of shares outstanding (all available shares offered), or alternatively you can just go to ShortSqueeze.com and they give the information to you automatically when you input a certain penny stock’s symbol. Short interest is only calculated twice a month in stocks, not everyday, so keep that in mind.
If you go to ShortSqueeze.com you’ll see what’s called “days-to-cover” which means that’s the estimated time it would take to cover all shares that are short in the penny stock.
Here’s The Point: The higher the days-to-cover aka short interest ratio, the more likely they’ll be a short squeeze!
So knowing this, how does it help you? Well, whenever I mention a penny stock is setting up to short, and you DO in fact open up a short position in it…you should check the short interest of that penny stock to see the possibility/magnitude of a short squeeze.
Here’s another point to consider: Say there has been a huge manipulated/hyped run of a penny stock that we all know is a scam company…every pennystocker out there is just waiting to short this thing at the right moment. Then that moment happens but now theres so much shares short (because of it’s popularity) that every trader now is vulnerable to a short squeeze.
If you’ve read this post and still don’t exactly know the whole deal behind a short squeeze, get my FREE eBook, cause I explain everything about the short squeeze.
The lesson here is to always consider the short-biased popularity on a given penny stock because the more shares short the more you’re at risk for a squeeze. Don’t get juiced!
A Chart Pattern That Will Make You Money Shorting Penny Stocks
Over Tues, Wednesday penny stock FRZ exhibited everything a potential short should: A quick surge up of over 100% in a span of two days all while having no news — a clear sign that this was a pump by a promoter (You can get a list of the top penny stock promoters here!). Knowing it was a pump, everyone knew there would be a dump. This is when your ability to read charts comes into play because charts will tell you EXACTLY when to short.
Well, FRZ developed a pattern on the 5-min chart that is known as a Triple Top Revsersal and it is one of the most predictable patterns to short. 9 times outta 10 the penny stock will tank when this pattern develops. The pattern sets up when a penny stock makes 3 equal(or close to equal) highs which is followed by a break in support. Pretty simple to understand, right? Here’s an illustration of FRZ yesterday (too bad I was in class and couldn’t short it) — YET another reason trading penny stocks is better than class! That’d be a good topic to blog about wouldn’t it?
This really is one of the best patterns for shorting penny stocks, and for good reason cause it works! The pattern is just like the Double Top explained in my FREE eBook, but instead of forming 2 “tops” i.e equal(or close to equal) highs, it forms 3. Consider this: The more a penny stock bounces off a specfic price point the more significant that price point becomes. Which is why the Triple Top Reversal is soooo much better than the Double Top, and more reliable..not to mention predictable…. and that’s all we want down here in the “gutter”
I’m planning on doing a whole series of charting 101 stuff, including how I set up my charts and more chart patterns, etc. in the next few weeks let me know if thats a good idea.
Response To A Reader’s Question: Pattern-Day Trading Rule
Hi Justin! listen I have one question about SogoTrade. You said something about limited amount of trades per week or did I misunderstand? how many stocks can I trade per day/per week?
Yes, If you’re a poor penny stock trader (like me!) trading with less than $25,000 then there are limits to your day-trading. This is not limited to SogoTrade, though, because every single brokerage out there has to follow the same rules…you can thank the SEC for their make-no-sense rule. Now a pattern day trader is one who makes 4 daytrades in 5 days…if you do that you are required to have $25,000 in your account. You CAN daytrade 3 times in 5 days if you have less than $25,000 BUT ONLY if you have a margin account.
You see me daytrading because even though I’m poor, I do have a margin account, therefore I can daytrade only 3 days a week. I haven’t yet used up my daytrades in a week since starting the blog, but I’m sure I will…and you’ll know cause I’ll complain and complain. Afterall if I really wanted to I could daytrade 3 times in one day..but that’s not smart considering I wouldn’t be able to trade for another week.
Plus if you want to follow the strategy outlined in my FREE eBook you’ll have to have a margin account. All you penny stocker’s with a cash account get NO daytrades whatsoever AND you can’t short penny stocks, or any stock for that matter.
If you have any questions, comment down ↓ there and I’ll answer them.
A List Of The Top Penny Stock Promoters
Penny stock promoters do exactly that: promote penny stocks. These promoters claim there will be 100%-1000% Gains! They send out daily emails after email explaining why symbol XXX is gonna go up 1000%. They’ll even send of faxes, make phone calls, etc.
Don’t fall for any of these stock promoters gimmicks as many of them are outright scams. The penny stocks that these sites promote and hype are your common Pumps & Dumps. If you’ve read my FREE eBook you know that I make my money shorting hype and manipulation in penny stocks that are caused by pumps and dumps. So while you shouldn’t trade a penny stock right off the bat that is mentioned by these promoter’s emails, etc there is money to be made after the pump and hype fizzles off.
I’m providing these links to make you aware if a certain penny stock you’re watching/trading is in fact a pump and dump.
Here is a list of the top penny stock promoters doing their “thing” right now…
If you know of other promoters promoting the hell out of penny stocks right now…right them in the comments section and I’ll put them in.