Otc trading strategies

Day Trading Strategies for Beginners.

Day trading – the act of buying and selling a financial instrument within the same day, or even multiple times over the course of a day, taking advantage of small price moves – can be a lucrative game. But it can also be a dangerous game for those who are new at it or who don't adhere to a well-thought out method. Let's take a look at some general day trading principles and common day trading strategies, moving along from basic tips you need to know to advanced strategies that can help you learn how to day trade like a pro. [If you're looking for a more in-depth option, Investopedia Academy has a three hour video course taught by a 30-year veteran of the industry.]

Day Trading Tips You Need to Know.

Not just knowledge of basic trading procedures, but of the latest stock market news and events that affect stocks – the Fed's plans for interest rates, the economic outlook, etc. Do your homework; make a wish list of stocks you'd like to trade, keep yourself informed about the selected companies and general markets, scan a business newspaper and visit reliable financial websites on a regular basis.

Assess how much capital you're willing to risk on each trade (most successful day traders risk less than 1-2% of their account per trade). Set aside a surplus amount of funds that you can trade with and are prepared to lose (which may not happen) while keeping money for your basic living, expenses, etc.

Day trading requires your time – most of your day, in fact. Don’t consider it as an option if you have limited hours to spare. The process requires a trader to track the markets and spot opportunities, which can arise any time during the trading hours. Moving fast is key.

As a beginner, it is advisable to focus on a maximum of one to two stocks during a day trading session. With just a few stocks, tracking and finding opportunities is easier.

Of course, you're looking for deals and low prices. But keep away from penny stocks. These stocks are highly illiquid and chances of hitting a jackpot are often bleak.

Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility. A seasoned player may be able to recognize patterns and pick appropriately to make profits. But as a newbie, it is better to just read the market without making any moves for the first 15-20 minutes. The middle hours are usually less volatile while the movement begins to pick up towards the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.

7) Cut Losses with Limit Orders.

Decide what type of orders you will use to enter and exit trades. Will you use market orders or limit orders? When you place a market order, it is executed at the best price available at the time; thus, no “price guarantee.” A limit order, meanwhile, does guarantee the price, but not the execution. Limit orders help you trade with more precision wherein you set your price (not unrealistic but executable) for buying as well as selling.

8) Be Realistic About Profits.

A strategy doesn't need to win all the time to be profitable. Many traders only win 50% to 60% of their trades. The point is, they make more on their winners than they lose on their losers. Make sure that the risk on each trade is limited to a specific percentage of the account, and that entry and exit methods are clearly defined and written down.

There are times when the stock markets test your nerves. As a day trader you need to learn to keep greed, hope and fear at bay. Decisions should be governed by logic and not emotion.

Successful traders have to move fast – but they don't have to think fast. Why? Because they've developed a trading strategy in advance, along with the discipline to hold to that strategy. In fact, it is far more important to follow your formula closely than to try to chase profits. There's a mantra among day-traders: "Plan your trades, then trade your plan."

Day Trading Like a Pro: Deciding What to Buy.

Day traders seek to make money by exploiting minute price movements in individual assets (usually stocks, though currencies, futures and options are traded as well), usually leveraging large amounts of capital to do so. In deciding what to focus on – in a stock, say – a typical day trader looks for three things: liquidity, volatility and trading volume.

Liquidity allows you to enter and exit a stock at a good price (i. e. tight spreads, or the difference between the bid and ask price of a stock, and low slippage, or the difference between the expected price of a trade and the actual price). Volatility is simply a measure of the expected daily price range—the range in which a day trader operates. More volatility means greater profit or loss. Trading volume is a measure of how many times a stock is bought and sold in a given time period (most commonly, within a day of trading, known as the average daily trading volume - ADTV). A high degree of volume indicates a lot of interest in a stock. Often, an increase in the volume of a stock is a harbinger of a price jump, either up or down.

Once you know what kinds of stocks (or other asset) you are looking for, you need to learn how to identify entry points – that is, at what precise moment you're going to invest. There are three tools you can use to do this:

Real-time news services. News moves stocks; subscribing to such services tell you when potentially market-shaking news comes out. ECN/ Level 2 quotes . ECNs are computer-based systems that display the best available bid and ask quotes from multiple market participants, and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the NASDAQ order book composed of price quotes from market makers registered in every NASDAQ-listed and OTC Bulletin Board securities. Together, they can give you a sense of orders being executed in real time. Intraday candlestick charts. Candles provide a raw analysis of price action. (More on these later.)

Day Trading Like a Pro: Deciding When to Sell.

Before you actually jump into the market, you have to have a plan for getting out. Identifying the point at which you want to sell an investment is called Identifying a price target. Some of the most common price target strategies are:

In most cases, you'll want to exit an asset when there is decreased interest in the stock as indicated by the Level 2/ECN and volume.

Day Trading Pro Tips: Charts and Patterns.

Previously, we mentioned three tools for determining entry points – that is, deciding the opportune moment you're going to buy a stock (or whatever asset you're trading). The most technical are intraday candlestick charts. We'll focus on these factors:

There are many candlestick setups that we can look for to find an entry point. If properly used, the doji reversal pattern (highlighted in yellow in Figure 1) is one of the most reliable ones.

Figure 1: Looking at candlesticks - the highlighted doji signals a reversal.

Typically, we will look for a pattern like this with several confirmations:

First, we look for a volume spike, which will show us whether traders are supporting the price at this level. Note that this can be either on the doji candle or on the candles immediately following it. Second, we look for prior support at this price level. For example, the prior low of day (LOD) or high of day (HOD). Finally, we look at the Level 2 situation, which will show us all the open orders and order sizes.

If we follow these three steps, we can determine whether the doji is likely to produce an actual turnaround and we can take a position if the conditions are favorable.

Day Trading Pro Tips: How to Limit Losses.

Trading on margin means that you are borrowing your investment funds from a brokerage firm. When you trade on margin (and bear in mind that margin requirements for day trading are high), you are far more vulnerable to sharp price movements. Margins help to amplify the trading results – not just of profits, but of losses as well, if a trade goes against you. Therefore, using stop-losses, which are designed to limit losses on a position in a security, is crucial when day trading.

A stop loss order controls risk. For long positions a stop loss can be placed below a recent low, or for short positions above a recent high. It can also be based on volatility: For example, if a stock price is moving about $0.05 a minute, then you may place a stop loss $0.15 away from your entry in order to gives the price some space to fluctuate before it moves (hopefully) in your anticipated direction. Define exactly how you will control the risk on the trades. In the case of a triangle pattern, for example, a stop loss can be placed $0.02 below a recent swing low if buying a breakout, or $0.02 below the pattern. (The $0.02 is arbitrary; the point is simply to be specific.)

One strategy is to set two stop losses:

A physical stop-loss order placed at a certain price level that suits your risk tolerance. Essentially, this is the most money you can stand to lose. A mental stop-loss set at the point where your entry criteria are violated. This means that if the trade makes an unexpected turn, you'll immediately exit your position.

However you decide to exit your trades, the exit criteria must be specific enough to be testable – and repeatable.

The Bottom Line.

Day trading is a difficult skill to master, requiring as it does time, skill and discipline. Many of those who try it fail. But the techniques and guidelines described above can help you create a profitable strategy, and with enough practice and consistent performance evaluation, you can greatly improve your chances of beating the odds. There is one final rule we should mention: Set a maximum loss per day that you can afford to withstand – both financially and mentally. Whenever you hit this point, take the rest of the day off. Stick to your plan and your perimeters. After all, tomorrow is another (trading) day. If you want to learn proven, profitable strategies you can start using today, from an experienced Wall Street trader, then check out Investopedia Academy's "Become a Day Trader" course.

Trading Penny Stocks: From $583.15 to $100k in 44 Days.

All right, time for our mid-day market recap. We’ll go over the trades from today. Go get my calendar out. Today is the …

Trading Penny Stocks: From $583.15 to $100k in 44 Days.

One of my early introductions to the stock market was when a friend in high school made tens of thousands of dollars day trading penny stocks over summer break. This would have been around 1999/2000 and at the time trading online with TD Ameritrade was still a new concept.

I always knew there was potential to make money in the stock market with a small account but I didn’t know how. I decided to open my own account but I was trading stocks like CAT, IBM, and AAPL. With my $1k account I made about $17 dollars. I was investing in the wrong stocks for big percentage growth.

OTC Penny Stocks vs NYSE/NASDAQ Penny Stocks.

Many of you have seen the movie Wolf of Wall Street. In that movie, they were trading a lot of penny stocks. The penny stocks they were trading were called the Pink Sheets. These are OTC Penny Stocks, which means they are not listed on the NYSE or NASDAQ exchanges. To be listed on the largest national exchanges you have to be fully transparent about your financials, and your stock must remain above $1.00 per share.

Companies that are not willing or able to provide complete financial documentation, who cannot keep their stock above $1.00 per share, or who are in bankruptcy filings, will trade on the OTC markets. The OTC market is further divided between 4 tiers, and the Pink Sheets are the bottom of the barrel. These stocks are traditionally, the worst of the worst. In order to be successful as a penny stock trader, you need to learn to navigate the waters between the OTC and the NYSE/NASDAQ markets.

The 4 Tiers of Penny Stocks: Redefining “Penny Stocks”

SEC Definition of Penny Stocks (priced between $1.00-$3.00)

Penny Stocks are defined by the SEC as any security issued by a small company that is trading below $5.00 (click here for complete definition). In the past penny stocks used to literally mean stocks trading under $1.00.

Stocks trading under $1.00 were almost always small companies struggling to find their place in the market and as a result those securities were very speculative investments for traders or investors.

In this day and age, securities priced between $1-10.00 in many cases still represent some of the most speculative and risky investments. This is especially true for small companies in the Biotech, Internet, and Fintech sectors.

These stocks can come out with news overnight that result in a 50% drop to the downside or a 100% squeeze to the upside. Anyone investing in these types of securities has to be prepared for the possibility of a total loss.

Just for reference, when I took $583.15 and turned it into over $100k in 44 days, I was primarily trading stocks between $1.00 – $5.00. These stocks all meet the min listing requirements for the exchanges, which is important to me. If I’m putting my hard earned money into a stock, I want to feel confident the company isn’t going to disappear overnight.

Traditional Penny Stocks (Priced between .01 cent and .99 cents)

Traditional Penny Stocks, in my opinion, are stocks priced between 1 cent and 99 cents. They aren’t below 1 cent (if you didn’t already know, stocks can trade at fractions of a penny). It’s not uncommon to see a stock priced between 1 cent and 99 cents that is still listed on the NYSE or NASDAQ. These companies will typically get a letter (which is made public), that they need to meet the listing requirements to have their stock above $1.00 within a certain amount of time. If they do it, the stock remains listed, if they can’t it will be de-listed and move to the OTC market exchange. However, it’s very important to note that stocks that trade above $1.00 will never have a spread less than 1 penny. That means the stock will trade 1.01 x 1.02, or 1.05 by 1.06, but never 1.015 x 1.017 (tens of a penny aren’t allowed).

When a stock trades BELOW $1.00, the stocks will trade down to fractions of a penny. In fact, they trade up to 4 decimal places, which is a thousandth of a penny. That means you will see a stock trade .0115 x .0116. This is why I don’t like trading stocks below $1.00! Trading above $1.00 is so much easier.

Sub Penny Stocks (Priced below 1 penny per share)

Sub-Penny Stocks are stocks that are below 1 penny per share. So that starts at .0099. These will not be NYSE or NASDAQ stocks, so for that reason I wouldn’t trade them. These aren’t particularly noteworthy beyond the fact that the companies aren’t strong enough to even have their stock priced at 1 penny per share.

Trip Zero Stocks (Priced .0001 – .0009)

Trip Zero Stocks are priced with 3 zeros. These are stocks priced between .0001 and .0009 per share.

As you can imagine these stocks after often used as vehicles for manipulation. Each increment the stock moves up is a 100% move versus the entry price of .0001. Many of the “hot penny stock” alerts are on sub penny stocks or trip zero stocks and primarily benefit the people who first bought the stock. If somebody buys 100mil shares at .0001 ($10k) and the stock goes up to .0010 they will sell with $100k in profits. Many of the stock promotion newsletters are sent by people who bought huge positions of these penny stocks.

Beginners Guide to Trading Penny Stocks.

Many people would consider becoming a millionaire by day trading Penny Stocks to be the ultimate rags to riches story. By trading the cheapest stocks on the market you can invest small amounts of money and see huge returns. But how hard is to make a living day trading penny stocks? It’s actually a lot harder than most would imagine.

The allure of quick returns draws the crowds into the penny stock market, where many end up losing their shirts. At the end of the day, only 10% of active traders in the market will actually be profitable. The rest are giving their money away to better traders.

After about 18 months of trial and error, I realized that there are a handful of stocks everyday that make big moves. The trick is learning to find those stocks BEFORE they make the big move. That became the basis for the momentum day trading strategy that I’m trading today. I apply this to day trading penny stocks & small cap stocks.

How I traded Penny Stocks for +$100k in 44 Days.

Are you a Penny Stock Day Trader or a Penny Stocks Investor?

In my experience penny stocks are so volatile, unpredictable, and subject to market manipulation, that being an investor is nearly impossible. You need to have a short term outlook in order to survive, and you need to be one of the first traders to get in and the first traders to get out with profit.

Remember that a penny stock company can have a horrible balance sheet, awful fundamentals, and then spike up 200% on breaking news of a new partnership.

For this reason, shorting penny stocks expecting the companies will go bankrupt is extremely risky. The fundamentals will matter eventually, but in the meantime, most investors can’t handle holding a position down 200%. I’m a penny stock day trader.

This means I follow a few very specific rules about how to pick stocks and how to trade them. Day Trading Penny Stocks at this point is like riding a bike for me. As this point, I can make $100k in 3 months without breaking a sweat, but remember it took me years to get to this point.

One of my favorite things is working with beginner traders in our Day Trading Courses because I know what it’s like to be brand new to the market! The reason working with beginner traders is so much fun is because I remember what it was like to be a beginner trader.

I consider myself to be no different from beginner traders, the only difference is that I’m a little further down the road to success and I can look back at where you are today and know what it takes to get you to where I am today.

5 Tips to Making A Living Day Trading Penny Stocks.

Avoid OTC/Pink Sheet listed Penny Stocks.

Companies trading on the OTC (over the counter) market have fewer regulations placed upon them as compared with stocks listed on the NASDAQ and NYSE. As a result, stocks on the OTC market are highly susceptible to manipulation and fraud. The only penny stocks I trade are listed on the NYSE or NASDAQ. I know these companies are facing stricter requirements to maintain compliance Don’t fall for the Promotional Pumps!

Many OTC Penny Stocks become promoted at one point or another. These promotions often come with messages like “this stock will be the next Apple”. The reality is, the next Apple is not likely to come from the penny stock world. It’s more likely the next big tech company will start as a large company that IPO‘s well above the penny stock price range, and then continues higher. When you are buying penny stocks to hold in hopes that it will be the next Apple, you become an investor of one of the most speculative financial instrument on the market. Only Trade Penny Stocks with Volume.

It’s really important to avoid illiquid penny stocks. Most penny stocks trade only a few thousand shares a day. However, when a penny stock has breaking news, they will often trade at 40-50x relative volume achieving 5 to 10 million shares of volume on a big day. These are the days I’ll trade a penny stock. The good news is that there is a penny stock having a once in a year event almost everyday! This means as a trader there is almost always something to look at. The Hit and Run Approach.

It’s important that I don’t look to hit home runs, to make 10-20k in a single trade. My focus is to trade penny stocks almost everyday and have a daily goal of $500-1k/day. That means anywhere from 100-200k in annual profits. Many small base hits ads up over the course of weeks, months and years. My focus is making a living by trading, rather than investing in penny stocks.

Want to learn more?

Many beginner traders start their trading journey with penny stocks. We actively encourage traders to AVOID penny stocks and instead trader stocks priced between $3-10.00. These are stocks that have the potential to make 20-30% intraday move, but retain the security of being listed on NYSE and NASDAQ.

As a result, they are more popular among traders and are often considered safer vehicles for trading and investing.

As you probably already know, I’m an active trader of stocks priced between $2-20, and occasionally trading stocks as high as $200. I trade stocks reporting breaking news such as earnings, contracts, FDA announcements, or other PR’s.

I look for that stock that is having a once a year event because that’s the stock every day trader will be watching.

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I've always been passionate about trading but never really imagined this passion would have turned in a real, full-time job. In fact, I've never found any service which I really felt that would help me become a professional trader.

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The Top 3 Risks With Trading OTC Markets.

The Top 3 Risks With Trading OTC Markets The OTC Markets (Over The Counter) is a market for stocks that don’t meet the requirements for being listed on a major exchange like the NYSE or NASDAQ and has become somewhat of a wild, wild west arena over the years. However, it still attracts a plethora […]

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25 Comments.

Great write up! Really happy with the quality of the information you provide, keep it up!

I’ve never traded penny stocks but is something I am interested in and I’ve heard a lot of good things about Warrior Trading. I’ve been following their youtube videos and really like Ross’s demeanor and patience.

I tried trading penny stocks on my own but failed miserably. Warrior Trading has helped me grow as a trader and I am much more confident in how I plan my day. Trading is tough so I’m glad I found the right help!

Signed up yesterday for their Warrior Pro class. Really excited to get started on the material and learn from these guys. Been doing a lot of research on trading penny stocks and these guys look like they have the tools and resources to really help me out.

Jimmy Gonzales.

I would like to invest $1000.00 in what people are calling trump stocks.

Wow, that’s really impressive Ross. Been following you for a while now on YouTube and Twitter and really like your material and the way you educate.

Thanks for the write up Ross! You always provide great information and you have truly improved my trading with your great insight and exceptional patience!

Went to the free chat today and it was pretty awesome. Guys are really professional and the room is well run. Gonna sign up for sure!

Nice job Ross! Been following you for a while now and am really impressed with how well you have been trading. Keep up the good work!

How does eSignal compare to TC2000? Looks like you use eSignal but was just wondering because TC2000 is cheaper.

Wow, that’s really impressive Ross. You have been a great source of inspiration to me and have kept me going. Been trading full time for almost two years and have finally started to find an edge thanks your training and the Warrior Trading community.

Does anyone know what broker Ross uses or recommends? Looking to start with their Warrior Pro course soon and wanted to get an account set up.

Hey Andrew, he uses Speedtrader but also recommends Suretrader and Tradezero for traders who can’t afford the $25k required for day trading. He also uses eSignal for his charting.

Awesome job Ross! Been following you on YouTube throughout this challenge, quite impressive. When will you guys be having another webinar?

Great write up and very impressive work Ross. Been a true inspiration to newbies like myself.

Nice job Ross! You the man and a true inspiration to use newbies!

this is all great but where do you find the info about new penny stocks? Where can i read up to find this information?

Looks like you started 2017 with great returns. I don’t know how you handle the pressure of trading in front of thousands of traders everyday but please keep it up. You have taught me so much and really appreciate everything you have done for trader education!

How can I get involved with Warrior Trading? I am completely new and i’m not sure where to start.

Ranganathan.

What’s. Commission carged for penny stocks?

I am currently trading penny stocks. Attempted 4 years ago when i was 22 and lost my 18k down to 800 dollars until i finally started to wise up. This year so far turned that 800 dollars into 39k.

Allen E Jackson.

I’m 27 years old, don’t know anything about trading and investing, I’m saving 1000 a month, and know were to start or anything this article is saying, need help understanding.

I’m one of your students and the quality and content of the education is second to none !

Sandra Jenkins.

What is the best company to open an account with?

Jorge Raul Rosales.

what if i have penny stocks from 35 years ago can you help me i haven in fidelity.

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OTC Markets.

OTC Market Totals.

Market 101 – Trading.

As mentioned in the previous section, trading an OTCQX, OTCQB or Pink security is comparable to trading a security on NYSE or NASDAQ. Investors may buy and sell securities through the institutional, online or retail broker-dealer of their choice.

Similar to the U. S. stocks exchanges, security prices respond to the supply and demand in the market. Investors desire to buy and sell securities at certain prices and broker-dealers provide liquidity by trading for their own account, matching orders internally or publishing quotes and executing with external broker-dealers. The number of orders, the volume (e. g. share size), the timing of buy and sell orders, and the availability of information determines how prices will move for a particular security.

A step-by-step explanation is the best way to illustrate the trading process. The example below is tailored for individual investors, although many of the same principles apply to institutional investors.

Investor Selects a Broker-Dealer – In order to execute a trade, an investor must select a FINRA-registered broker-dealer (or multiple FINRA member broker-dealers). Investor Makes an Investment Decision – All investment decisions should be based on thorough research on the company and security. For securities that trade on the OTCQX, OTCQB and Pink markets, investors can use otcmarkets to access the information companies have provided, including trade data and company news and financials to help facilitate an investment decision. Investor Defines the Order – Investors define the order they wish the broker-dealer to execute. There are two main order types: the Limit Order and the Market Order. Limit Orders allow investors to specify the exact price they are willing to accept for a buy or sell order. While Limit Orders are designed to offer more price protection for investors, a Limit Order may not be executed if the price of the security does not reach the price stated in the Limit Order Market Orders direct the broker-dealer to immediately execute either a buy or sell order at the current ‘market price’ – the best bid or offer Investors must decide whether price (Limit Order) or timing/immediacy (Market Order) is more important to them. Broker-Dealer Executes the Order – Once a broker-dealer receives an order, it often goes through the following decisions as part of the trading process: Execute Trade Internally – Broker-dealers will typically first determine if they can or choose to execute the trade internally. Internal executions occur if they can ‘match’ (same prices for a buy and sell order) Limit Orders or if they choose to trade for their own account. If they are trading for their own account, they must give investors their limit order price or the NBBO (National Best Bid or Offer) as defined by an Inter-dealer Quotation Systems (OTC Link® ATS/FINRA OTCBB) at that point in time. This rule is known as Best Execution and is among the regulations discussed in Part 3 - Regulation Trade Marketable Order Externally - If the broker-dealer cannot, or chooses not to, execute the trade internally, he/she must attempt to execute the trade with another broker-dealer. OTC Link® ATS provides trading and messaging capabilities, and therefore, facilitates the process of ascertaining whether the order is marketable. Marketable orders are orders where the price specified can immediately be executed in the market. Market Orders are, by definition, marketable. Limit Orders are marketable if the limit price is less than or equal to the bid price (for sell orders) or greater than or equal to the ask price (for buy orders) (i. e. execution is at a price better than or equal to the limit price). For example, a customer’s Limit Order to buy security XYZ for $30 will only be marketable if the offer/ask price is $30 or less. If the offer price is $30.01 or greater, then the limit order is not marketable and will not be executed. If the order is marketable, the broker-dealer may utilize OTC Link® ATS to negotiate a trade electronically with a specific broker-dealer (or group of broker-dealers) or may contact the broker-dealers by other means of communication Create/Edit Quote on Inter-dealer Quotation System – If the order is not marketable, the broker-dealer may create or edit its existing quote on an Inter-dealer Quotation System (e. g. OTC Link® ATS) to reflect a new price or size. The quote communicates the price at which a broker-dealer is willing to buy or sell. Broker-dealers are only required to update their quote if the price of the order is equal or superior to their existing quote (See FINRA Rule 6460 and Part 3 - Regulation). In many cases, a broker-dealer quote is the aggregation of a number of customer orders. Often, at a client’s request, broker-dealers will not display the entire order because this information may cause the other broker-dealers to move their prices resulting in inferior or no execution Trade Non-Marketable Order Externally - Once a broker-dealer has a quote posted on OTC Link® ATS, they may receive a trade message via OTC Link® ATS from another broker-dealer; as the market changes, a broker-dealer with a standing quote may also initiate a trade message electronically. At that point the broker-dealer may accept, decline or counter (send a different price or size) the offer to trade . The broker-dealers then negotiate trade price/size, one of the main differences between a trading a security off-exchange and trading a listed security. There is no central system that matches/executes orders for off-exchange traded securities – all trades are agreed upon directly between the broker-dealers. OTC Markets Group’s trading platform, OTC Link® ATS, facilitates the speed at which trades are negotiated. Broker-dealers are liable for their quote price and size, and those firms that decline liable orders are subject to penalties from FINRA. While broker-dealers may communicate by phone, one of the benefits of OTC Link® ATS is the ability for broker-dealers to trade and message electronically, creating a more efficient trading process Broker-Dealer Reports, Clears and Settles Trade – Once broker-dealers accept an offer to trade through OTC Link® ATS or through another means of communication, they must report, clear, and settle the trade. Part of this process is the confirmation of the trade with the investor; however, the trade will not be complete until final settlement (the delivery of funds by the buyer and the delivery of securities by the seller), which, for equity securities is generally three business days after the trade date (T+3). While OTC Markets Group’s products and services facilitate the reporting, clearing, and settlement process by transmitting trade data to the broker-dealers, all three functions are the responsibility of the executing broker-dealers Reporting – Broker-dealers are required to report their trades to FINRA within 30 seconds of the execution. This information is then disseminated by FINRA to the market. OTC Markets Group offers this ‘real-time’ trade data within a number of its products OTC Dealer, OTCIQ). All other trade information is on a 15 minute delayed basis Clearing and Settlement – For equity transactions in OTCQX, OTCQB and Pink, clearing and settling, the matching of trades and the movement of money and securities, is often handled by third-party firms for the broker-dealers.

The explanation of the trading process has been abridged to describe in a more streamlined manner how securities efficiently trade on OTC Link® ATS and in excess of $600 million every day. For a more detailed analysis of the trading process, please contact our Trading Services department.

Additional Concepts.

Further knowledge on the structure of the market is important to understanding the market for a security. The subjects listed below only touch on high-level concepts of trading techniques, strategies and market structure. To find out more information, please see our Whitepapers.

From a trading perspective, liquidity is the ability of a security to be bought or sold without causing a significant movement in the price of the security. Liquid securities may be bought and sold in large numbers without a dramatic movement in the price of the security. The opposite is true for illiquid securities. Liquidity depends on a number of forces, including supply and demand, price transparency, trading history, market venue, market participants and freely tradable shares (public float).

“The Spread” is a term that applies to all markets and represents the difference between the highest bid price and the lowest ask price. For example, if “the bid” is $10.00 and “the ask” is $11.00, then the spread is $1.00. The spread is one of the ways that broker-dealers, specifically market makers (a type of broker-dealer that provides liquidity by quoting and trading both sides of the market), make money. In an ideal world, broker-dealers want to buy at the bid price and sell at the ask price. This scenario allows them to have very little risk and make “the spread” on each share transacted. Unfortunately for market makers, this scenario is not extremely common due to price volatility – movements in the price of a security.

Volatility makes it possible for broker-dealers to lose money, providing liquidity to both sides of the market. Security purchases at the bid price can become unprofitable if the price quickly or significantly moves lower. Therefore, spreads tend to be wider (larger) in very volatile or illiquid (not easily tradable) securities.

Spreads are often a function of the amount of information available in a security. This information may come in the form of past trading data, news or company financials. If very little information is available in a security, spreads may be very large because the broker-dealer does not want to be caught off guard by a better-informed investor. Conversely, active securities with current disclosure tend to have tighter spreads because broker-dealers believe they have sufficient knowledge of the company and the security to buy and sell with confidence. Investors are wise to pay attention to the spread of any security, and in particular, to those where the issuing company does not provide quality disclosure.

Short selling is a trading strategy where an investor, believing that a security is over-valued, borrows (from a broker-dealer or institutional investor) and sells a security and then repurchases and returns (to the broker-dealer or institutional investor) the security at a lower price. The difference between the sale price and the purchase price is the investor’s profit. Short selling is a valid trading strategy; however, there are two important points that investors must remember: Short selling carries with it unlimited risk because the purchase price of a security can rise to any price point. Conversely, long investors (buyers) may only lose the amount invested – if, for example, the security price drops to zero Short sellers are subject to price manipulation schemes – or short squeezes. In a short squeeze, traders believing that there are a lot of short sellers begin buying shares to force the price and the short seller’s losses higher. These traders hope that the short sellers will be forced to buy pushing the price even higher at which point they can sell their shares at a profit. Short squeezes are easier to execute in illiquid securities.

See how regulation affects market structure and processes in Part 3 - Regulation.

How to Day Trade OTC Penny Stocks.

Penny stocks, also known as OTCs, attract a unique group of traders to the stock market due to their low share prices and exceptional volatility. Newer traders with smaller account sizes often see penny stocks as opportunities to grow their account at a rapid rate.

At Investors Underground, we generally don't trade penny stocks for one simple reason; the volume isn't there. As day traders, we gravitate towards both volume and volatility. If either of these two main components are missing, so is the trade setup. That said, when the OTC markets have the right volume, there can be plenty of trade opportunities. That said, trading penny stocks is a lot different than trading NASDAQs. There is a whole new set of rules you need to follow in order to give yourself an edge.

As of recently, the OTC market has been hot. Here are some tips to keep in mind when trading OTCs.

Know Your Risk.

As mentioned above, penny stocks can be attractive due to their exceptional volatility. It's not uncommon to see a stock run a few hundred percent in a few days. While this type of action is exciting, it's important to maintain a realistic perspective. What goes up must come down, and it's not uncommon for penny stocks to grind down to zero.

A stock that runs a few hundred percent in a few days can drop in price just as easily (and quickly).

Before even considering trading penny stocks, make sure you are aware of the risk so you can plan your trades accordingly.

Trade the Tickers - Don't Buy the Hype.

The fact remains that most penny stocks are garbage and there's a reason why they are priced the way they are. Avoid buying into any of the hype at all costs.

Hype is everywhere - mailing lists, press releases, message boards, etc.

If you visit stock message boards, you will find plenty of people pumping stocks and explaining why the company is the next big thing. Don't be a sucker.

If you are going to trade penny stocks, do just that: trade them.

Buying into the hype is a great way to find yourself stuck in a stock that keeps grinding down.

Pinpoint Support and Resistance Levels.

Before even entering a trade, make sure you are familiar with key support and resistance levels. While this is important for any stock you trade, it's even more important when a penny stock is experiencing an exponential run.

Knowing where key support and resistance levels are can help you understand the potential risk and reward for the trade. Once you have pinpointed these levels, you can choose a position size that enables you to better control your risk.

For example, if a stock has is at $0.07/share and a key support level is at $0.05/share, you know the risk is $0.02/share. If you buy 100,000 shares, your risk is $2,000.

Make sure you are aware of multiple support levels, as there is no guarantee that any support level will hold.

Understand Industry Trends.

OTC stocks tend to run on hype, and this hype is generally industry-wide. Make sure you are aware of the "hot" sector so you can find stocks accordingly.

For example, Marijuana stocks are running right now due to the fact that many states are voting on legalization this election season. If you are looking to trade OTCs, you will want to narrow your focus to Marijuana companies.

As a reminder, these stocks are running on hype and you are simply looking to trade them. Just because a company is in a hot sector, does not mean that they stand any chance of competing in that sector.

Watch the Level 2 Screens.

Level 2 screens are especially helpful when trading penny stocks. Penny stocks trade less rapidly so it's easier to analyze the supply/demand levels in real time. Understanding supply and demand levels can help you make better trading decisions.

For example, if a stock has traded 5 million shares for the day and there are 1 million shares at $0.20 on the ask, you have good reason to believe that $0.20 may be a strong resistance level. It would take 20% of the stock's daily trading volume just to get above $0.20/share.

Here are a few other things to look out for:

Dilution : Does it appear as if someone is selling an endless amount of shares at a certain price? Market Makers: Is a certain market maker controlling the majority of buying/selling volume? Support/Resistance Levels: Where are the majority of orders set on the bid/ask? Blocks: Does it appear as if a seller is trying to unload shares on the ask (or a buyer trying to load up on the bid)?

Level 2 can be a great complement to your charts. Charts represent historical transactions whereas Level 2 represents potential future transactions.

Don't Short the Frontside of the Move.

Shorting penny stocks is a dangerous move. It's not uncommon to see stocks run a few hundred percent. These are not rational moves and the stocks do not have to drop in price at any time.

Never short the front side of the move. It may seem like a stock has run "too much" but it hasn't.

Know When to Swing.

Trading OTCs is not about buying breakouts. You should focus on buying dips and selling into breakouts.

For that reason, swinging positions can often yield better results. For example, you may not want to buy a stock when it is up 50% on the day, whereas you may consider buying a position when it has pulled back 20% and is close to a support level.

Of course, anytime you hold a stock overnight, there is added risk, so make sure you have a plan.

Choose Your Indicators (Less is More)

Many traders use technical indicators to defend their theses about stocks. One day, the stock has to go up because the RSI is oversold. The next day, the RSI is normal but the MACD is about to crossover. If you are going to use technical indicators, make sure you do so systematically.

Technical indicators such as VWAP, Fibonacci retracements, and moving averages can be helpful when trading penny stocks, but you should be consistent with the ones you use. Let the data do the talking. For example, if trading bounces off of significant Fibonacci retracement levels works for you, use that. If placing trades based on VWAP helps you, use that. Technical indicators should help you make smarter decisions. They shouldn't be used to justify decisions you've already made.

Know When the Party's Over.

Penny stock runs won't last forever. Say it to yourself over and over again.

At one point, you need to take your profits. More importantly, you need to know when the run is over so you can focus on other opportunities.

Almost there. please check your for a confirmatioN!

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