OTC stocks have had a bad reputation for years. When the “The Wolf of Wall Street” hit theaters in late 2013, it made a lot of people scared to touch OTCs. But then marijuana stocks got hot and the OTC market showed signs of life.
And then it died. You couldn’t buy a play in the entire market for years. But the cycle repeated in 2017 when bitcoin went on its infamous run. This time, it’s all about the coronavirus …
My Top Students Crush OTC Stocks
Many of my top students started their trading careers with OTC stocks. Why?
Personally, I think they’re easier to understand. There are fewer factors to consider when making your trading plan. Plus, the risk-reward is far superior to listed stocks — especially on multi-day runs.
#1. Keep Things in Perspective
Again, the majority of the time I exit positions too soon. Then haters always say…
“Tim, what’s wrong with you? These stocks can keep going — give it more time.”
They’re right — OTC stocks can keep going. But it’s inevitable that they’ll drop. These are crap companies. Their fundamentals are usually worthless, and they typically only run on a press release.
Then they drop again.
Here’s a great example from a couple of months ago with mCig, Inc. (OTCPK: MCIG).
MCIG was a textbook OTC breakout. But it gapped down the day after the breakout because it released bad earnings. That was the end of MCIG’s run.
Related:- E-mail Marketing VS Spam (DO’s & DON’Ts)
#2. Learn From the Past
OTC stocks are hit and miss. They’re usually great the first few months of the year because of the January Effect … Then they die off. Since the market’s cyclical, it’s critical that you learn from historical examples to prepare for future OTC runners.
Here’s a historical example on Texas Mineral Resources Corp. (OTCQB: TMRC)…
TMRC had a nice run from 30 cents to $1.50. That’s a 500% spike.
There’s no one specific way an OTC will drop. Some drop off in a day or two. Others take weeks or months. The question isn’t if they’ll drop — that’s inevitable. It’s when they’ll drop.
These moves don’t surprise me. And because I’ve seen it so many times, I often play it too safe. When you study the past, it becomes easier to see the patterns in real time.
That’s when you’ll know that you…
#3. Know the Patterns
Each of these examples is making its way through my “PennyStocking Framework.” Yes, it’s a few years old, but the patterns still work. It blows my mind hearing students complain about not understanding patterns. But they haven’t studied some of my most basic lessons.
For example, in February, CytoDyn Inc. (OTCQB: CYDY) had a nice run-up from 30 cents to the $1.50s just like TMRC. And when it started to crack, people wanted to dip buy on the first red day.
OTC stocks follow the same basic pattern. When they spike 400%–500% in a few days or weeks — be conservative.
Find OTC stocks confusing? Check out “The Complete Penny Stock Course” by my student Jamil. It combines all my lessons into one book. It’s a great way to learn the rules I follow when I trade.
CYDY was entering the sixth stage in my PennyStocking framework when the COVID-19 pandemic struck fear around the world. The company took advantage of the situation and transitioned its HIV drug to treat coronavirus symptoms.
CYDY announced the FDA approved of its HIV drug for COVID-19 trials. The stock gapped huge on the news … topping out at $3.50. If the company continues to update people on its trial, this move could just be beginning.
Related:- 6 Tips for Writing Effective Emails
#4. Be Prepared
Case in point … U.S. Lithium, Corp. (OTC: LITH). It was uptrending nicely so I wanted to take advantage before the trend turned.
I recognized it was overextended. I bought the first big green day with volume, but it was also the fifth green day in a row. Normally, I’d never buy the fifth green day. In hindsight, I also shouldn’t have held this overnight.
But because I was prepared, I had two profitable trades. I didn’t overstay my welcome, and I kept things in perspective.
I know this might seem complicated. Stocks might seem random and unpredictable. Trust me — we all started there.
Remember: preparation is key. Spend more time studying the past. Immerse yourself in the patterns. And not just the basics, but all the nuances too.
#5. Adapt to the Present
I’ve been trading the same patterns for two decades. But that doesn’t mean they play out exactly the same every time. It doesn’t work that way. You have to learn to adapt to the present.
The first two months of the year the OTC market saw a lot of false breakouts. Then … the action dried up for a month.eople get tired of a pattern when it stops working. Breakouts can be powerful, but I recognized they weren’t working well at the start of the year. What happens one month might not happen next month.
NBDR was halted by the SEC due to suspicious activity. The company is a total scam and took advantage of the coronavirus situation to pump its stock. The SEC’s action could be the beginning of the end for coronavirus OTC stocks.
This is another great example of why you need to cut your losses quickly and never invest in OTC stocks. NBDR had multiple spikes and plenty of great trading opportunities. Don’t confuse trading with investing. They’re very different.