Advice from a guy who has been doing this since 2003 and is somehow still solvent. You want to know how to avoid the worst traps and make money on penny stocks? It's easy. Avoid dilution scams.
Some of you might know me as a frequent poster on the shortsqueeze sub. I do occasionally read stuff here without commenting but after reading a couple of posts here lately, I feel prompted to add my two cents in.
Why do I think my opinion is valuable? Well, I've been doing this since 2003. Trading penny stocks, mid-caps and options on U.S. and Canadian listings. And somehow I'm still solvent, having been "retired" since 2014 so I can't be doing that badly. I'm a 43 year old with a grand total of 8 years of work experience on my resume. Which might be a concern for me except I haven't had a job interview since 2006 and probably won't have one in my life again.
Now what nearly made my head explode and prompted me to make this post is the blatantly obvious contradiction in this sub's recent popular posts. Someone asked how to avoid traps. Fine. Valid question. But on the other hand, the most popular post on here is from some dude who bagged profits on XTIA and is now sharing his trading method. I mean...the stock collapsed 75% in two days. Isn't it quite obvious that the guy just got mega, mega lucky that he sold the hot potato before it turned into a rotten carcass infested with anthrax? You want to avoid traps...so why are you listening to the guy that just bought and sold the biggest one we have seen this week? It doesn't matter that he made money on it. What matters is his method didn't screen out a stock that took shareholders to the woodshed days after he traded it. What are you going to do? Put a stop loss on a stock that gaps down 75% after hours?
I don't want to drag that guy through the mud. Unlike the scammers and self-proclaimed gurus on the shortsqueeze sub, he came across with humility and honesty. The issue is I just don't find his advice to be that great, sorry. Maybe the method he shared works for him, but it's certainly not a method I would ever use. For instance, I'm first and foremost a news and/or story trader. Especially in Canada where there is no pre-market so you have a chance to scour the news feeds in the morning and get in at a good price at 9:30. As opposed to the U.S. where 3 seconds after some good news hits the wire, the bots already have the stock up 100% in pre-market.
You want to know the simplest way to avoid traps? Avoid dilution scams. I have written a number of posts recently about this issue, look at my post history for more info.
What is a dilution scam?
You all can use Google or read what I wrote elsewhere, but my summary definition is a listing where management is purposely acting in bad faith to dilute the stock and pay themselves a good salary. Their prime business isn't whatever they say it is on their website or on their Yahoo Finance bio or wherever. Their prime business is scamming shareholders.
Penny stocks are by their very nature risky. Most start up businesses fail. A business lucky enough to be publicly listed has access to equity and therefore capital. So should it fail, it can try to raise capital and try again. This results in dilution of the stock. But the key difference is that management is acting in good faith. They are trying to find a business that will eventually make shareholders money.
A stock that is down 90% from say, 2015, obviously has failed. But you can still reasonably say management has acted in good faith.
Adjusting for splits:
XTIA has dropped from ~$1,200 to $6 in less than a year.
CRKN has dropped from ~$30,000 to under $0.10 in three years.
MULN has dropped from ~$30,000,000 to under $0.50 in four years.
TOPS has dropped from ~$1,000,000,000,000,000 - that's right - one quadrillion to $7 in 20 years.
A loss of 90%? Sure, management might still be acting in good faith even if they suck at what they do. But there is no way a stock can drop from $30,000 to $0.10 in three years without management purposely and actively acting AGAINST the will and interests of shareholders. It's just not possible to be THAT bad at business.
How do you chart for that? Seriously, how do you use TA on a stock like XTIA when its sole purpose of listing is to scam people to the benefit of those in charge of the listing? You don't. You just get mega-lucky if you happen bag profits on it.
Think HARD about what charting actually is. It was created under normal market conditions with companies behaving generally in good faith. To try to determine investor buy and sell psychology. If a company failed, it went bankrupt. TA wasn't created in a time where it was possible for a company to string people along for 20 years to the point that their split-adjusted stock price has 15 zeros behind it. There is NO TA that is remotely reliable for these type of stocks and anyone trying to tell you that is lying to themselves or selling you a bill of goods. TA is used by these companies to generate retail liquidity fodder to dilute into and pay their next round of salaries.
So you want to know how to avoid traps? Look at a stock's 1 or 5 or 10 year chart. If the stock price is going from something like $50,000 to $1, it's very likely a dilution scam. It's such a simple screener that will be 99% right. And yet so few people do it then complain after the fact that they got a rug pull.
As for a stock like LODE, it was $75 in 2012 and is $0.28 today. Yeah, that's shit, but not quite at the level where you can conclude with certainty that management is acting in bad faith. LODE has been a science project for a long time, and those are notorious money burners. Those type of stocks you need to comb through with further research because they are in a gray area. But that doesn't stop you from being able to blacklist XTIA, CRKN, MULN, EFSH and dozens of others which clearly exist only to separate retail shareholders from their money. Then you will have more bandwidth to analyze the ability of stocks at LODE's level of quality or higher once you jettison all the crap.
PS: Yeah, umm, that was me...but in the shortsqueeze sub, sorry:
