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!
Follow Tim

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.

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!

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.

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.

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…

StockPreacher

HotOtc

NYtimesreport

LeBed

SignUp Stocks

Beacon Equity

TheStockster

StockEgg

BestPennyStocksNow

LiquidTycoon

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.

When it comes to trading penny stocks having all the right tools can mean all the difference in trading penny stocks successfully. Below I compiled 8 penny stock tools that every pennystocker should use.

MicrocapMarkets.com a great site for daily penny stock information nasdaq > 5, otcbb’s, and pink sheets. Some features include:  Most actively traded penny stocks, news coverage (like mergers, earnings, etc.), Biggest % gainers as well as % losers, biggest volume penny stocks, plus much more. If you sign up for their free market report you can have all this information sent to you daily @ 4pm to help you prepare for the next trading day.

Pinksheets.com a informal site that provides quotes & news, market activity (share volume, higest/lowest # of trades, advances & declines), and you can search for pinksheet companies. Overall a nice site..if pinksheets are your thing.

Yahoo Finance a great website for looking up a specific penny stock you’re trading or want to trade. You can find news, earnings, company profiles, etc. Word of warning though, do not listen to what is being said on the message board for your specific penny stock!

StockCharts.com personally I think they offer some the best stock charts out there. I’ve been using them for quite some time and they have everything you need. They also offer a  screener with predefined scans that is defintely something to brag about. Basic free service is all one really needs, but they do offer premium charts. Check out PennyStocker’s Public Chart List that I have there.

StockFetcher.com this is my #1 screener that I use to find my hot penny stock picks. The screens go above and beyond what you could imagine with every variable you could think of. This is the best penny stock screener there is bar none. I even give out one of my exact scans I use in stockfetcher inside my FREE eBook.

Yahoo Screener a basic screener offered by yahoo that is practical to find penny stocks. I’d reccomend stockfetcher over this screener, but if you have a thing for yahoo, go for it. Can’t go wrong.

BarChart.com another solid site with a information based/stock screener built in. Instead of you putting in your own parameters bar chart gives them for you like 52 week highs/lows, top 100 stocks, volume leaders, price advances/declines, etc. A great site here for any penny stock trader.

DDMachine a fantasic site to do your own due diligence. DDMachine combines alot of the above sites into one. A Definitely must visit site for anyone trading penny stocks.

“Scam” is a word you hear all too often, especially down here in penny stock land. It’s true, penny stocks are penny stocks for a reason — that is they don’t have an effective business model, don’t turn a profit, or can’t payoff debts long term.

For now, lets focus on the issue of not being able to payoff long term debt. If a company can’t pay it’s debts off longterm then it’s an outright scam, period.

To find out if a company is a scam bring up the company’s balance sheet and calculate the debt-to-equity ratio( is a measurement of that company’s financial leverage, i.e. the company’s ability to borrow and repay money). To calculate the company’s debt-to-equity ratio you divide its total liabilities by it’s total shareholders equity. If the result is greater than 3 than that company most likely won’t be able to pay its debts off long-term.

Lets take a look at an old favorite penny stock COIN. You can view this company’s balance sheet here. By looking at the balance sheet you can tell that this company is an outright scam. By dividing its total liabilities: 27,571,000 by total shareholders equity: 5,047,000 you get an answer of 5. Since this is above wayy above 3 they won’t be able to payoff their longterm debt. What is a company if they can’t payoff their debt?

Lets take a look at COIN’s 2 year chart.

Penny Stock scams like this are a short sellers dream! Shorting these beast of scams is one of my best strategies.

This particular stock is not the only scam out there. Look around at the 1000’s of penny stocks out there! Many of them will be pumped, hyped, and manipulated to the max by illegal stock promoting and all you have to do is short them and ride them back down to where they came from.

This is exactly how you take advantage of penny stock scams. Wait til they’re pumped up 50%, 100%, or even 500% and short them at the right time and the odds are in your favor.

Ever wonder why I include little snippets like “this company has XXXXXXXX in debt” in my daily penny stock list? Because certain most penny stocks are scams and these are the ones you short whenever they have big run-ups out of nowhere. By shorting these penny stocks you can make tons of money, that’s what you want, right?

This post is a follow up to my previous blog about the Best Penny Stock Brokerages.

Oftentimes when penny stock traders enter the game of short selling penny stocks they assume just any old brokerage they use to buy penny stocks will be sufficient enough to short sell them too. Yet that assumption is WRONG. It has to do with 2 things:

1Some brokerages won’t let you short penny stocks

2The issue of share availability (borrows) comes into play

Your typical mainstream brokerages like Etrade, Scottrade, and TD-Ameritrade will not be tolerable when short selling penny stocks. I’ve heard horror stories of penny stock traders trying to short with these brokerages, specifically with these brokerages not having shares available to short a desired penny stock. When you’re short selling penny stocks down here in the gutter, they typically are coined “hard to borrow” stocks, i.e. shares available to short are limited.

So what does Etrade, Scottrade, and TD-Ameritrade all have in common? They all use the clearing firm Penson Financial. A clearing firm is an organization that works with brokers and exchanges for your trading transactions. They are the ones that control the shares available to short, etc.

The problem is that there are so many brokerages and accounts tied up with this specific clearing firm (Penson Financial) that shares are very very very limited because different brokerages are asking for shares left and right. Getting shares for these penny stocks is already hard enough, but this compounds the problem making it nearly impossible at times to find shares to borrow with these brokerages.

And yes this does include the Thinkorswim brokerage. They clear through Penson Financial aswell. So now you know why you can never get those shares…at 7 in the morning! While I do love Thinkorswim (customer service is fantastic) they just don’t cut it from a shorting penny stocks standpoint. Especially now that they were bought by TD-Ameritrade.

By now I’m sure you’re asking yourself “what ARE the best brokerages for short selling penny stocks?” The answer is easy – find a brokerage that is self clearing i.e does not work with a third party clearing firm. But I made it easy for you and list the 2 best brokerages that self-clear!

Interactive Brokers is a top-notch penny stocking self-clearing brokerage. It’s one of the best for short selling penny stocks as they usually have shares available for any penny stock, including pink sheets & otcbb’s. The 2 reasons I don’t use this brokerage – #1: They have a $10,000 minimum to open an account there, and since I’m poor, that automatically knocks me out.#2: They require you to be 21 years or older to open a margin account. (You have to have a margin account to short sell penny stocks). So since I’m only 18 that excludes me from opening an account there for..umm…3 more years. If it tells you anything about the quality of the brokerage 2 of the best pennystockers around Timothy Sykes and Muddy use this brokerage for short selling penny stocks.

SogoTrade is who I use to short sell my penny stocks with. They clear through Genesis Securities which is their parent company. Shares are almost always available to short any penny stock with an exception being below $1…but I don’t do that anyways. They even had shares of GOE, you know, this one. It was only allowed to trade 50,000 shares a day and somehow SogoTrade had some of those shares available to short. That tells you how good they really are with their borrows. I highly reccomend this brokerage to anyone who wants to profit from short selling penny stocks, especially if you have less than $10,000 as this brokerage seems to be the only feasible option in town. If you sign up with Sogotrade within the next few days make sure to use my referral code: 340190.

So how’s Good Friday treating everyone? I flew back home last night to Atlanta for the weekend to mess around and whatnot. I don’t know about you but I could handle a little dose of legit penny stock trading right now. Needless to say things have been pretty boorrring down here penny stock land since Tuesday. Speaking of boring, my penny stock watchlist from yesterday slimmed down to just 4 and none of them triggered any trades, from me atleast. Oh and for future reference, trading before an off-day is usually pretty light with not alot of movement so it wasn’t like I was expecting much.

So where was I? Oh yea – here are the Best Penny Stock Brokerages (ranked in no particular order)

Zecco Definitely one of the premier discount brokerages for penny stocks. They offer a standard web-based trading platform which they claim executes market orders in 1.07 seconds. That’s damn fast! Commission wise they’re $4.50 which is pretty legit, but you can find lower, as you’ll see. Cool fact: If you have $25,000 OR make 25 trades a month you get 10 free trades. Actually Un-Cool, cause I dont qualify: #1 I’m poor & #2 I don’t over-trade or force a trade, so atleast for now I’ll never make 25 trades a month. Maybe you apply though? Also there is no account minimum with this brokerage firm. Zecco is a must look into if you’re considering a penny stock brokerage.

TradeKing Yet another good discount brokerage for penny stocks! Why else would it be on my list? Commissions here are $4.95 a trade. Offers some pretty cool trading tools in web-based trading, but in reality you really don’t need any of these cool toys, just a basic charting service is all you need in trading penny stocks. Like Zecco, TradeKing also has no minimum to open an account. Claims they’re #1 in customer service but personally I think Thinkorswim(no pun intended) is the best in that category…which leads me to another best penny stock broker…

Thinkorswim I personally used this brokerage to buy and short penny stocks. You can do commissions on a per share basis or a flat rate of $10. To buy penny stocks it’s great, but to short them, well….I’ll get into that in a separate post coming up titled “Best Brokerages To Short Selling Penny Stocks”. I really can’t say enough about their customer service which was top top notch. Their platform is totally legit/awesome with ringing alerts, charting software, scans, plus many other options. If I had a question I’d pull up the handy-dandy chat box in the platform or email them…..sometimes even the CEO Scott Sheridan answered my questions. How cool is that?

SogoTrade I currently use ‘em and am loving it. They have a basic web-based platform that’s all I need to buy/short penny stocks. I can’t tell you how great they are with shorting…but again, I’ll explain this in an upcoming post. At $3 a trade you can’t beat it, and for the first month you get free trades! Oh and listen to this, it took 4 days to open an account from start to finish. 4 days! Overall I couldn’t be happier with my penny stock broker.

*TIPS

1) Canceled Orders: Make SURE it is free to cancel orders the brokerage you might/are using. This is soo important as you’ll find yourself canceling placed limit orders left and right when the bid/ask fluctuate.

2) You know on some brokerages, typically smaller firms like speedtrader – you can negotiate commissions with them. Many don’t realize you can do this but you can.

3) If any of you trade off your phone consider getting a brokerage with a web-based platform, otherwise you won’t be able to access it from your phone.

With this post I aim to clear some of the haze and skepticism that surrounds short selling penny stocks. Here are some common frequently asked questions regarding the short selling of penny stocks.

Q: You can short stocks under $5?

A: Of course you can! For some reason many believe that you can’t short stocks just because they are penny stocks. You can make money shorting penny stocks just like many of you make money buying penny stocks. In many cases you can buy a penny stock and profit on the way up THEN short the penny stock and profit on the way down. It is a really simple concept and a definite must need strategy that you can add to your arsenal. The more trading strategies you have, the better, right?

Q: What brokerages allow me to short sell penny stocks?

A: You can only short penny stocks with a select number of brokerages. You’re typical Etrade, Scottrade, and Ameritrade aren’t going to let you short penny stocks. You need a brokerage like Thinkorswim, Interactive brokers, or Sogotrade. I will elaborate more on choosing the right brokerage for short selling penny stocks including the one I use in a post coming in the next few days. Stay tuned!

Q: Can I short with a cash only account?

A: No, you need a margin account to be able to short sell penny stocks. A margin account is required because when you short sell, you borrow shares of a penny stock that you don’t technically own.

Q: How much money do I need to short sell penny stocks?

A: That depends on the brokerage you use. Some brokerages require you to have as little as $1,000 dollars for a margin account and others require as much as $10,000 for a margin account. You can make money short selling penny stocks with as little as $500 and that’s the beauty of penny stock land, because it doesn’t take a lot to make a lot.

Q: Is short selling penny stocks legal?

A: Absolutely! Everything about short selling penny stocks is legal, all you’re doing is profiting from a drop in a stock price. The irony to this is that my strategy is to short sell illegal activity i.e. pumps and dumps where individuals illegally pump up a stock price. This happens all the time in penny stocks and is why it’s so easy to profit from short selling the “dump”.

Q: Is it risky to short selling penny stocks?

A: There’s always added risk when you short sell you’re borrowing shares that aren’t yours, so there is an added risk there. It’s really more intimidating as it sounds but you do have to be more careful. If you stick to the solid rules detailed in my FREE eBook you shouldn’t ever have a problem that involves trouble with paying back lost money.

Q: I heard short selling penny stocks is harder than buying penny stocks. Is that true?

A: Absolutely not, in fact many pennystockers make more money shorting penny stocks than buying penny stocks. Just because it’s not a popular tactic (It will become one, no doubt) doesn’t mean it’s a hard concept. Down here in the gutter it actually makes sense to short sell because many of these penny stocks are outright scams. Anytime any of these scam companies are hyped and manipulated upwards this is where short selling really comes in handy.