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.

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!

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.

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.

I was right on as the we got a short squeeze, but it really didn’t squeeze as much as I would’ve liked, but good enough for me to put in my order for 1000 shares short @ 3.94. I figured the odds were on my side for this penny stock to drop back down below the low of the day made earlier in the morning. I thought I was on the right track as it proceeded to drop to 3.82, but then quickly jumped back up to 4.00. It flat-lined at 4.00 for a few hours causing me to rethink my positioning in this penny stock especially since I had class within the hour. In my mind I was still confident we’d make an afternoon fade down to the low of the day or further…..

So I went to Spanish class short in a penny stock that I THOUGHT would have an afternoon fade. When class got out I figured I’d get back to my computer to see this sucker of a penny stock down to the low of the days. Yet the exact opposite happened…as I opened up my SogoTrade platform I saw that DRL 4.69! .75 cents above my shorting price! I got juiced! I quickly covered my position and absorbed my losses of $752.

This lose totally erased my nice $661 dollar gain on MDVX I made on April 7.

With all the bad that surrounded this trade, some good DID come out of it. Here’s a lesson that can be learned from my lousy trade.

Never have a short position (or any position for that matter) that you’re not confident in open while you’re away from your computer or can’t keep watch.

Also, another lesson I learned is that I shouldn’t go to class. Just kidding!

Hopefully with that lesson learned I can prevent this kind of mistake from happening again. For your viewing pleasure I’ve attached the chart I was looking at when I made & closed the trade.

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.

Not making your own decisions is costly in trading. Sure you can listen to what someone has to say about certain stocks but when it comes down to making a trade it is ultimately YOU who needs to make the decision. Other individuals are often times unreliable and irrational. Listen to yourself and make sure you’re comfortable with your own choices.

You’re Not Prepared

The night before or in the morning of the next trading day have your watchlist put together and ready. Know your specific price points you’re going to buy or short at. I know it sounds crazy, but you shoud visualize the trades and plan your trades when they reach certain points. This will make it that much easier when all hell breaks loose at the opening bell @ 9:30 a.m.

For you Thinkorswimmers: Those people shorting penny stocks with the brokerage Thinkorswim better be prepared first thing in the morning (7am eastern) to reserve those shares in those hard to borrow penny stocks. If not you might not have any shares to short on that day.

You Don’t Have A Strategy

If you’re one of those wreckless traders who just sees a stock going up and says “that looks good because it’s going up, i’ll just buy it here” – then I’ll feel really sorry for you then……and later when you don’t have any money left in your account. Come up with a simple strategy so you’re not blindly throwing money around. For me, it’s simple – I only buy breakouts and short pump and dumps. Come up with yours today!

You Don’t Understand The Market

Most people don’t realize what aspects of the market affect your selected stock. Any press release, world, or economic news can take your stock down in an instant. There’s nothing you can do about it but every trader needs to be aware of what can happen. Down here in penny stock land hype and manipulation control most of the price action in these particular stocks, and is part of the reason why it’s so simple to profit down here in the “gutter”. On the flip side, you need to understand what happens during hype and manipulation and what it does to penny stocks to actually reap these easy profits.

You Don’t Have The Right Tools

If you’ve read my eBook, You know I’m a huge believer in having the right tools to trade with. For me, I have the perfect brokerage, different scans, stock charts, quotes, etc. It’s important that you have whatever tools are necessary for your trading niche. For some day traders that means having L2 quotes, for others it means having a chart with 5 min time intervals. Simply put if you dont have the needed tools, you’re trading will suffer.

Get A Quality Brokerage

It’s important to get a good quality discount brokerage with low commissions to do your penny stock trading with especially if you have a smaller account size as commissions can do some damage. I use and reccomend Sogotrade – Only 3 Dollars a Trade.

Throw Away The High Expectations

Don’t have high expectations – you’re a beginner so don’t expect huge % gains to come quickly and right off the bat. If you have high expectations when you start down here in pennystock land you’re just affecting yourself and your trading negatively. With high expectations comes pressure to perform, and as a penny stock trader you don’t need to deal with unneeded pressure.

Start Small

You should start trading with small positions. As a newbie, don’t put all your eggs into one basket. Spread you money around in different stocks so you’re cutting your risk especially in your beginning stages. As you grow more comfortable trading penny stocks you can increase position size in a specific stock to the point where you’re trading two, three, maybe even one stock (I wouldn’t recommend this) with you’re whole account.

Do Your Own Homework

Don’t buy a penny stock just because it’s was posted on a message board or in a chat room. Do your own research and due diligence – I promise you’ll trade better because you’re comfortable with your own decisions plus it’s more gratifying to profit from a stock that you uncovered and researched yourself.

Get a Mentor

Find a mentor or educator and follow his site. I remember when I first started I was always just trying to find inspiration and to know that I can succeed and profit from trading penny stocks. So it’s very important and I’m sure you think the same, to find a website/mentor that can give you inspiration and education.

Don’t Be Greedy

This tip builds off tip #2 – don’t be greedy! I can’t tell you how bad traders mess up when they just want more and more. What usually happens is that end up earning less profit or watch a profit turn to a loss.

Don’t Get Over Confident

Don’t get over confident, if you’ve made a great winning trade congratulate yourself (cause you deserve it) and move on to the next stock. Don’t feel like you’re invinsible, because well, you aren’t. You’re just as much likely to loose all you gained in that winning trade in your next trade if you trade with a cocky attitude. Trade intelligently!

Trade Instead Of Invest

“But I want to invest in a penny stock @ $.01 and sell when it goes to $1.00″ – it’s rarely the case that a penny stock can make you a lot of money if you invest with it long term. Very few of these penny stocks are actually legit companies therefore most will never go up in the long-term. What most penny stock traders do is trade the hottest, volatile, volume-heavy penny stocks each day holding them for the short-term.

Short Selling

You can make money when penny stocks go down, too! It’s called short selling and while it’s not exactly for a newbie, if you’re up for it you should definitely try it out. If you think a penny stock is going to go down, you short it, and make money when it goes down. It’s that simple. Get my FREE ebook at pennystocker.com to learn how to do it.

Stay Tuned

Keep up to date with my site for daily hot penny stocks to watch & make sure to follow every tip to insure your success in penny stock trading.

I was eager to short the heck out of it as soon as it busted some key support in the $1.50ish area. Surely enough it busted through that support in the early morning and I entered my short at $1.45 and proceeded to watch it literally tumble down to 1.23 within 10 minutes. I was up over $400 at this time but my greediness took over and I kept telling myself that It had to go even lower.

Well, a common early morning short squeeze came through and within another 15 minutes I was about even. Since it was my 1st trade for the new blog I wasn’t going to mess with the stock anymore and closed out at $1.46 for a minimal $25 dollar loss. Would have been $28, but I still have some free trades with Sogotrade!

I woulda coulda shoulda maybe held on and I would’ve caught that sweeet afternoon-fade back down to the low levels of the day. But I’m not always right, and I had already gotten beaten once.

So yes, while i got JUICED by the short squeeze I did learn a valuable lesson today: Take your profits and move on, especially if it’s a huge sell-off early in the morning because there’s a great chance of a short squeeze then. Also, I can’t forget I could’ve sold part of shares whenever I had that profit but I wasn’t thinking about it at the time. That definitely would’ve taken some emotion out of the trade.