Penny Stock Trading Strategies (Backtest)

Penny stocks offer a low entry and often the lure of striking it big. The internet is full of stories about how you can make millions and gain thousands of percent of returns in penny stocks. Is it any reality in this? Can you get rich trading penny stocks? Unfortunately not:

You are unlikely to get rich trading penny stocks. On the contrary, you are much more likely to lose your money. Penny stocks and OTC stocks have an average negative annual return of 24%. Over 90% of penny stocks fail.

Penny stocks – those that trade for low prices, often less than a dollar per share – are dangerous. Period. This is why:

What are OTC and penny stocks?

Practically all penny stocks are OTC stocks (over the counter). Let’s start by defining penny stocks and the OTC market since they both go hand in hand:

Penny stocks trade for low prices, typically below 5 dollars per share, and they are traded on the over-the-counter, or OTC, markets. OTC stocks are shares of companies that do not trade on major exchanges (like NYSE, Nasdaq, Eurex, etc.).

Because most OTC stocks are illiquid, have a small market capitalization, and few “professional” players they are often prone to huge moves. A one-dollar move in a two-dollar stock is 50%, while only 2% in a 50-dollar stock. This explains why investors are drawn to the OTC market. Traders and investors want to get rich quickly. This rarely ends well.

We have previously written an article explaining why penny stocks are bad.


Penny stock trading strategies

We remind you that we have hundreds of other backtested trading strategies.

Can you get rich trading penny stocks?

About three years ago, Tim Grittani decided to begin trading stocks with his life savings of $1,500. Today, the 24-year-old’s portfolio is worth more than $1 million.

The quote above is taken from an article on CNN Business. No wonder many are tempted to try to make money in penny stocks when they read headlines like this.

But the return properties of OTC stocks are very distinct from all other stocks listed on national securities exchanges and you are unlikely to repeat Tim Grittani. Grittani is the exception.