Welcome to the Gutter

Always one to be looking for a way to make extra cash, I decided to jump into the risky realm of day trading and swing trading.

My past experiences in the stock market haven't been pretty. I lost a ton of money on Fidelity Select Electronics (FSELX) during the NASDAQ crash in 2000. Lesson learned...don't invest in a mutual fund that's all tied to one sector.

I jumped back into the stock market earlier this year, buying and holding stocks, thinking I could do a good job of picking stocks. Wrong. For example, I bought some Wamu thinking that I had picked the bottom....wrong (never, EVER try to pick bottoms on stocks!!!!!!). Lost more money, and it didn't help that I was being charged $19.95 per trade with Fidelity. Large commissions will kill you if you have a small account.

Always seeking to get better, I joined Covestor. Covestor tracks your trades and performance, which is available to all other members. You can check who's doing the best and see what trades they are making. I noticed this one guy, Timothy Sykes, who was making huge returns and was outperforming a lot of the people on Covestor. But I noticed one thing that was weird....he didn't have any holdings! WTF is going on?

I then found out that the guy trades penny stocks. Penny stocks are the gutter of the stock market. While some of them are real companies, many are failing companies, and some aren't even real companies at all (pump n dumps, anyone?). These are the smallcaps and microcraps, err, I mean microcaps in the market.

Anyway, I found out that Tim trades these stocks. He doesn't invest in them. You don't invest in microcraps, since most of them will fail as companies. But, since they are so volatile (i.e., they can have big price movements in very short periods of time), you can make good money trading them....if you know what to look for. Also, you have to get in and out of these stocks quickly...which is why Tim didn't haved any holdings....he stays liquid most of the time.

So I decided to jump into trading the penny stocks. I started with a small account, around $4200. From April to the beginning of June, I struggled. I made TONS of mistakes, and my account had dwindled to $2800 by early June. I had some winning trades, but WAY more losers. Trading is NOT easy.

However, those mistakes were good learning experiences (nothing like the pain of losing money to get you good at something), and I formed a set of trading rules to abide by so I wouldn't make those mistakes again.

Those rules are now paying off. Since June 10th, I'm up 13% to over $3100, and I'm dramatically outperforming the S&P 500 (down 3.3%) in those 10 days. My average winning trade is almost 10% per position, and my average loser is only about 4% per position (and I'm looking to improve on those stats).

That's the nice thing about penny stocks....they aren't tied to the market and you can do well regardless of how the market is doing.

The guys that have helped me the most on this are Tim Sykes (up 50% in 6 months, totally outperforming the S&P) and a trader named Mike (100% returns per month!!!! He's up 350% so far!!!!).

The other thing that helped me was switching from Fidelity to ThinkorSwim, which is much more trader friendly. Commissions now are only $5 - $10 per trade.

I'll keep you guys posted on my trades and my progress in this new blog series.

Welcome to the gutter.