For people that are interested in the wild, wild west of investing, penny stock investing is the place to be. A great deal of people in the financial world frown on penny stock trading but the fact is, a lot of money can be made trading penny stocks. To begin investing in penny stocks, the first order of business is compile a list penny stocks that meet your criteria. Stocks trading on the OTCBB and Pink Sheet exchanges are highly volatile, so extreme due diligence is a requirement when building a penny stock list.

Ok so you have a list of penny stocks you are considering for your list. First the potential candidates must be screened. Screening is a method of formulating a list of stocks that you watch every day; it is a method of narrowing the field. Consider looking at stocks closing at their 52-week high for investing ideas for a continuation of an uptrend if the stock holds the breakout for a couple of trading sessions. Also consider a list of those stocks that sink to a 52-week low and are in a potential position for a bounce play. Penny stocks trading at their 52 week high or 52 week low have the potential to be huge gainers in a penny stock portfolio.

Another way to build a list of penny stocks is a stock scan. A stock scans applies a technical formula to a large population of stocks and returns a list of stocks that meet some filter criteria associated with that formula. For example, a scan may show a list of stocks that are moving higher after experiencing a significant downtrend. Another scan may show a list of stocks that are now showing bullish price and volume characteristics during the past week possibly because of recent news from the company or a sector wide bullish trend for all stocks in the sector.

Stocks that climb to ten or one thousand times their original price are not uncommon in the penny stock market. Stocks that trade in a channel, bouncing between prices, can be traded with a buy-low-sell-high strategy. Many penny investors have made a small fortune buying penny stocks in this fashion. Trading in and out of stocks that hold a pattern of days and weeks.

Be sure when you build your penny stock list to pay attention to diversify among stocks from various sectors, so that the probability of getting hit on all stocks all at once is limited. For example, if the oil sector is in an uptrend, junior oil companies trading on the penny stock exchanges tend to run in tandem with there bigger brothers on the larger exchanges. The same goes for precious metals stocks such as gold and silver.

Technical analysis is key to finding the proper stocks to add to your list. Charting software allows the investor to see the patterns the stock has formed over time. Usually, all stocks form a pattern and bounce off established support and resistance areas. If a stock has visited the same area many times in the past, strong support has probably been established and odds favor that the stock will bounce off this support area. The same goes for the area of strong resistance. To break through this area, there should be significant reason and usually a quick search for a news item released from the company will justify the break out of strong resistance.

Building a list of penny stocks takes time and careful hours of study. Once the core list is built, stocks that do not perform can be omitted and others can be added as time passes. Eventually the investor will form a core list of stocks, learning how they trade, when to enter and when to exit and making a profit. Penny stocks are highly volatile and with any instrument that is volatile, the potential for high reward brings with it the potential for high risk.

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About the Author

Phillip Hatley is a frequent trader in the penny stock markets. For more information about building a list of penny stocks, please visit his blog.