An Interview With
Tim Sykes on Profitable Penny Stock Trading
The following interview is extracted from my book, Breakthrough Strategies of Wall Street Traders. Similar to Market Wizards, within it I interview 17 remarkable traders and investors for their investing stories and unlike other investing books, get them to actually reveal the trading-investing rules and techniques they use as well as what they tried that didn't work. If you want to learn trading and investing, start with these systems.
You would be hard pressed to find a more frightening stock market niche than the penny stock arena. Prone to frequent pump and dump schemes, most unwary individuals lose their shirts chasing the hyped promises of tremendous penny stock profits. It is hard to find profitable traders in this arena at all, and yet trader Tim Sykes has made millions in this extremely volatile field time and time again. What was his breakthrough?
In this interview Tim will reveal the trading rules he uses for consistently making profitable trades on both the long and short side of the penny stock market. Pump and dump scams run by the mafia (The Wolf of Wall Street boiler room type operators) don’t scare him because he has learned how to entirely avoid or piggyback their scams for trading success. He currently has a 15-year track record of profitability as well as a list of successful students who have also mastered his techniques for low-price stock trading.
Many traders over the years have asked me how they can get started trading the markets with very little money. Their first thought often turns to penny stocks, but I have always avoiding discussing this particular niche because of its track record of nearly total ruin. From Tim’s story, however, you will learn how some particular trading rules, many of which are similar to those promoted by Mike Ser and Andy Man, can help you successfully navigate these waters and beat the market manipulators by anticipating their manipulations. This is one of the most intelligent discussions of penny stock trading you are likely to encounter, and the insights on trading rules can be used for higher priced stock trading, too.
Tim, how did you get started with trading and in particular with penny stocks, which are stocks that generally sell for less than five dollars?
I got started trading in high school. My parents gave me control of my roughly $12,000 bar mitzah gift money and they said, “Have fun with it, put it to work in the stock market” and as a high schooler they thought I would lose everything. They thought it would be a good lesson for me.
Instead I turned the $12,000 into over $120,000 in one year of high school and then nearly one million dollars after my freshman year in college. It wasn’t due to the normal stocks. At first I started to trade the big stocks, which at the time were Netscape and Yahoo, but the stocks just didn’t move. I had such a small account that my account balance wasn’t going up enough so I eventually found penny stocks because they were so volatile.
I know that the average volatility of S&P 500 stocks is much, much less than that of stocks trading for less than $1.
With penny stocks some of these companies can go up 50% or 100% in a day or two. I was like, “Wow, that’s what I need for my smaller account.” I have become an expert at this unloved niche because I think it is ideal for where smaller accounts can really grow fast if they follow certain rules.
I think this niche is ideal for everybody with less than $100,000 to their name. I think it’s ridiculous how CNBC, Bloomberg, and all these major financial channels focus on business news. That’s great if you are trying to trade like a hedge fund or mutual fund. Making 20% per year for those guys is great because they are managing millions and billions.
If you make 20% on a $50,000 account this is $10,000 for the entire year. I always want to earn an extra $10,000 but that amount is not going to change my life. So the niche is really for people who have smaller accounts and they want to have the potential to really grow it.
Stocks like Google, GE and Bank of America get all the headlines but their stocks just don’t move. You have to recognize the volatility of penny stocks and embrace it. If you utilize it correctly and know the right patterns and right trading rules then you can really grow your account fast.
When people hear the words “penny stocks” the first thing that immediately comes to their mind is the risk. How is what you do different from the typical penny stock trader who ends up losing everything?
Most people look at penny stocks like Lotto tickets and they are always trying to find the next Microsoft. They think that is how you make it big. That is just not reality. It’s such a long shot. There have been a few penny stocks that have gone on to become multi-billion dollar companies, but that is like finding a needle in a haystack.
I prefer a much lower risk strategy and I tailor my approach to taking on lower risk. Because I know that penny stocks are so volatile I don’t need to hit a huge homerun. I can hit singles so I try to find volatile penny stocks where they can double or triple in a few days and I try to take the meat out of that move. I try to take 50% gains here or 30% gains there. While stocks are tripling I don’t try to capture everything. I just want to use that stock to grow my account and do that several times a week or several times a month.
Do you think that this is the key to your penny stock trading success, which is the fact that you are just going for a little bit of a big trend?
I try to be like Ichiro Suzuki. Ichiro is one of the biggest hitters of all time in baseball and he just goes for singles. It’s not that he can’t hit homeruns, but he knows that homeruns and grand slams are much lower odds so he has specialized his whole career in hitting singles and that is what I do. If you do enough of them (hitting singles) and stay in this niche and really get the hang of it then a good strategy can grow an account to millions of dollars.
Is your trading style something that works continuously without interruption in all types of different market environments or do you have to wait for some special fundamental market conditions to really do well?
That’s the beauty of penny stocks. There is always something moving based on world events, promotions or some new technology. Usually there is anywhere from five to ten really hot penny stocks at any given time and they are all moving 10%, 20%, 50% or sometimes 100% per day. They are really not that difficult to spot. What is difficult is staying disciplined and that’s why I use specific trading rules that are specifically designed to keep me safe.
For instance, driving can be very scary to someone who has never driven a car before. You have this huge machine that can go very fast and is very dangerous. You hear about accidents all the time. However, if you stay within the lanes, follow the red lights and stay within the speed limit then driving is very enjoyable.
That’s very similar to trading penny stocks. You are safer if you learn the rules such as cutting losses quickly and focus only on companies that have good earnings as opposed to focusing on companies with pie in the sky technologies. You must pay attention to the road signs in the penny stock market.
Based on your past success it sounds like you have a very tested selection process for picking penny stock trades. I am always interested in ferreting out the secrets of trading success for some particular approach and so I have to ask what you are doing for trade selection and risk control that is different from most penny stock traders?
When you are dealing with smaller accounts the key is staying in the game. You cannot afford to risk blowing up and losing everything because then you are out of the game. It doesn’t matter how good of a penny stock you find if you have no money to trade it with and then cannot profit so you need good risk management. It is so, so important. It is the most important thing.
Any time I am in a penny stock, whether it’s a long position or I am shorting them (betting against a penny stock promotion scam that causes a temporary run-up in penny stock prices like you see in The Wolf of Wall Street movie) … whether I am long or short I always, always, always cut losses quickly and never risk disaster.
Disaster is the number one problem that traders have because they let their egos get into the trades, they don’t cut losses, they add to their positions when they go against them and say, “Oh, maybe it’s going to come back.” Sometimes they do come back and they saved themselves, but they played with fire. Sometimes when you play with fire you are going to get burned. I don’t ever want that to happen so no matter what my position is I never let a loss get more than 10%.
Do you use stop-losses to lock in that 10%?
With penny stocks the market makers can actually see all the stop-losses and because penny stocks are not actively traded you don’t want the market makers to see where you are at. A lot of people have been taught to use hard stop-losses in other market sectors but with penny stocks the market makers just take the stops out and then put the stock price back up to where it was before. The market makers are just laughing to themselves.
Therefore with penny stocks I use mental stops so I am watching a stock more often. You cannot really just leave your computer for two weeks at a time and not look at the stock. I usually check in, even when I am traveling, once a day just to make sure there is no news and it is not really breaking my 10% rule.
Because penny stocks are so cheap, everyone wants to know how much they need for a small account and how many stocks they can be trading. How much money does somebody need as a minimum to start out trading penny stocks?
Some of the top students I have trained started out with $1,000 or $2,000. My top student Tim Grittani started with $1,500 of his own money and in four years he has now grown it to $2.1 million. I know that sounds crazy but I also started with $12,000 and grew it into $1.65 million in four years. When I started making money with penny stocks people said my results were crazy, luck or fraudulent but I’ve actually trained other people to do this and so people are now saying, “Wait a minute there might be something to this.”
That’s why we are having this interview, which is because this is an overlooked niche where some people with the right mindset, qualifications, system and discipline can finally succeed in this market without needing a lot of money to start.
If you have $1,000, $2,000, ideally $5,000 or $10,000 then you can trade these stocks. I usually only have one or two positions at a time. I like to have a lot of cash on hand just in case to stay very liquid for any potential technologies that pop up or any press releases I can react to. There are new technologies with the mobile internet all the time. I like to stay very liquid and just have one or two positions from these hot penny stocks that are moving.
Let’s talk about your top student that you just mentioned. What did he do differently than the other people you have trained in order to have that big success? There has to be some differentiating factor.
He really wanted it. It comes down to how badly you want to be successful in this type of trading. Everyone wants to make millions but most people don’t want to put in the time and effort to get there. I know that studying is not cool, it’s not fun and lot of people stink at school but you have to do it. I stink at math and somehow I’ve made millions of dollars so I don’t think it is about intelligence.
Tim Grittani is a great guy, a Midwestern kid just out of college. He deserves all his success, but I think the reason for his success was not based on intelligence. It was his dedication to studying. There are patterns you can learn, basic rules on how to protect yourself and how to find best stocks that are a basic roadmap or blueprint that he used to grow his account exponentially.
Let’s follow up on that and go into some of the exact trading rules one should study and depend upon for success in this niche. I know you cannot teach everything, but people are always interested in examples of the exact buying and selling rules they can immediately use to understand how to trade a new instrument or niche. What are one or two exact trading rules people could use when trading penny stocks?
Rule #1 – you really need to focus on just the most active penny stocks. Do not listen to all of these companies that supposedly have all these amazing technologies but which only trade a few thousand shares a day. There are thousands of penny stock companies out there. Every one has big dreams and makes promises but almost none of them come true.
That said, there is a small group of stocks every single day you should follow. You can pretty much look at any financial website for just the biggest percent gainers and most actively traded stocks. Penny stocks are stocks trading under $5 per share, so you are looking for these actively traded penny stocks that are moving ideally due to some news.
I like buying some companies when they report good earnings, when the stock is up 20-30% and a lot of people are scared to buy it thinking, “Oh, it’s up so much that I don’t really want to chase it. Maybe it will come down.” But if it is up 20% or 30% in a day based on good earnings news that is because the entire company is getting revalued at a higher valuation based on these new numbers.
Usually a small company trading at $2, $3 or $4 a share is viewed as a not so successful company. When one of these long shots really hits a home run in terms of revenues, growth, new users, sales, or sometimes the CEO is quoted in a press release saying business is looking great and stronger than ever, maybe margins are growing, … whatever the reason if the stock is up 20% or 30% on the day then I like to buy it that day because over that day, week or month the trend is usually up as more and more investors discover this new surprisingly strong company.
In other words, you are not simply chasing stories. Instead you are monitoring price action and only reacting to buy when the story behind the price action shows fundamental news behind it. You are often reacting to price increases based on earnings news and then getting in.
Correct. Price action with a catalyst. It’s not just earnings. You might have a company that won’t report earnings for another month or two but they might announce a big contract with a company like AT&T or Apple. When a small penny stock announces a contract with a Fortune 100 company you have to ask why this Fortune 100 company wants to work with this tiny little company. They must have something special. I’m looking for a positive catalyst and I’m looking for a good price reaction in the marketplace.
Sometimes you get a positive catalyst and no one looks twice at the penny stock. That’s usually a tipoff to something very sketchy. Sometimes penny stocks announce contracts, but when you look down deeply into the SEC filings and legal filings they are not really that big.
For instance back in 2000 when I first started there used to be a penny stock that announced a big deal with FedEx. FedEx was going to work with this tiny company and the reaction was, “Wow, this is amazing.” If you read the press release they were designating FedEx as their official shipper. They basically opened an account with FedEx and were putting out a press release about this. That’s not a contract, okay? That kind of news should not be bought.
So you are first watching price action in this sector, finding a penny stock where the price action is very big - like a 20% move on the day - and then you are checking for fundamental news to confirm the move. If the news is something very significant then you consider buying.
Correct. If the news has legs.
Conversely I am often short selling on news because I like to bet against penny stock scams. Some penny stock scams can drive prices up 20% or 30% because of hyped up news. You have all these penny stock newsletters mailing and saying, “Wow, look at this. This penny stock is the next Microsoft or eBay or Google.”
There is a lot of propaganda with penny stocks. When those stocks are moving up 20% or 30% in a day I look to short sell them because that hype usually fades since it is not based on reality.
How do you know that the news is hype versus real news with some significance? What are your criteria for determining that?
Penny stock pumping is very common and it is very easy to tell the difference between penny stock pumping and a real contract. A real contract usually has a press release where a big company who is using the smaller company’s services is quoted. Something like “XYZ company has an amazing new product and we are excited to work with them.”
When it is blatant penny stock promotion like in The Wolf of Wall Street boiler room type stuff the big company is not quoted in the press release. Sometimes there isn’t even a big company. Down at the very bottom of the press release or email that you get is a disclaimer with very tiny print that says, “This company has been compensated five million shares (or five million dollars) to send out this press release.” It is basically a very coordinated press campaign and most of it is lies. It is illegal, a very gray area.
I’m not a lawyer so I cannot say that what they are doing is fraudulent, but what I do know is that when someone is compensated to send out press releases and emails on a penny stock usually that means someone is paying them in order to dump the shares. They pump up the stock price in order to dump the shares. That is a “pump and dump” and those kinds of stocks can rise 20%, 30% or sometimes 50% in a day or two, but they usually come right back down the next day or next week or next month. They all inevitably end up at zero because those are the scams.
This is great information for how to identify scams, but how do you know you have the top for one of these scam promotions that you usually short? If a stock is being promoted it might keep going up for weeks so that you might lose your shirt if you short it. Are you looking for something else to confirm when you should short them?
This is the beauty of using trading rules. When you are down 10% on a stock you should cut your losses so that you don’t risk disaster. If you are shorting a stock and it just keeps going, guess what? Some scams keep going for weeks or months. However, if you stick to the rules of cutting losses then you cannot get hurt that bad.
Also I don’t usually look to short a stock on the first day that it spikes. I like to wait and see if it is up 50%, 75% or even 100% or 200% over the course of a few days or a few weeks. Penny stock pumping has a limited lifespan. Going back to my hypothetical example, somebody has paid five million shares or five million dollars for a series of emails or press releases to promote a stock. That money is spent and you have to think that every single press release or email that gets sent out means less money for what they want to do next time, but you don’t know when the promotion will end. It is not an exact science. I lose sometimes doing this, but I win roughly three quarters of the time.
If you have a penny stock promotion campaign then depending on whether it is one million dollars, two million or even five million dollars they are spending, it usually only lasts one or two weeks. They don’t have enough money to keep it going for several months, let alone years.
When I am buying penny stocks based on contract news or buying a company with good earnings I like to buy on the first day of that news because I am thinking that this good news has legs. When I am betting against a penny stock scam I prefer them to have already run up several days if not several weeks beforehand.
Are you usually more successful on your long or short penny stock trades?
It is a mix. I made my first million buying penny stocks. I made my second million shorting penny stocks. I made my third and fourth million kind of mixed. I just take the opportunities when they come up.
This is the beautiful thing about penny stocks. You have some companies that are good, some companies that are bad and then a whole lot of companies that are doing nothing. Sadly most people focus on the companies that are doing nothing because they believe in their stories.
If it is me, sometimes I might have two trades in my portfolio. One of them might be long and the other short. Because I believe I have a generally successful approach for both sides of the market I can profit on both of them. I therefore try not to be biased whether to go long or short. I just take the opportunities as they come in.
For the rest of the interview, pick up a copy of Breakthrough Strategies of Wall Street Traders (an average interview includes 20+ pages of techniques) on amazon.com.
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