When you were a kid did you ever play Hot Potato at a party? Do you remember the rules of the game? In Hot Potato, everyone sits around in a circle. There was an object to pass. When the music starts you passed the “hot potato” to the person next to you who quickly passed it on to the person next to them. The object of the game was to make sure you were not holding the potato when the music stopped. If you were, you’re out.
So why do I think these games are like the OTC markets? Simple, when the music stops these stocks head lower and those still in the stock are going to be out.
If your a short term trader the OTC market is just like playing ”Hot Potato”. When the music stops if your still in the stock your going to be out.
So how do you hear the music? Usually, the music starts as newsletters begin to pick up coverage on a stock. Newsletters alert potential investors to a stock that maybe just had news or looks like a good trade from a technical standpoint. As the music begins investors begin playing and the trading activity starts to pick up. As the activity picks up new investors pick up the stock through volume and price scans. Message boards begin to heat up as people are looking for opinions and doing research. Investors begin to talk about these stocks in the live chatrooms as well. On the front end when the music gets going there is lots of positive chatter and the stock heads higher. People are in the money and things are good.
This is when you need to take your profits. ALWAYS BOOK YOUR PROFITS WHEN IN A POSITION TO DO SO.
So how do you know if the music is about to stop?
Well for me, I keep a very close eye on the level 2 quotes which displays each market maker and their prices. I want to figure our early who the main market makers are in the stock and how they are trading the stock. If you see these market makers on the bid looking for stock this is a good sign. When you see them go to the offer side I like to see them make a few sales and move higher. This is a great indicator that the music is still playing.
I have a ticker on the stock I am trading so I can see each trade as it goes by. I want to see more trades go across at the offer price as opposed to the bid price.
You should also use a short term (3-5 minute) chart of the stock as well so can see where support and resistance develops in short time frames. A stock is going to go up and down throughout the day but using short term charts will allow you to gauge if the stock is within its daily trading range or has broken below. You will also want to have volume bars up on your charts. This way you can see if the volume is staying steady or beginning to slow.
If the overall market conditions are strong the music can keep playing for days or a week or more. If you are trading in a weak market sometimes the party only lasts a few hours to a few days. Always understand what type of market you are trading in.
As you gain more experiance trading penny stocks you will begin to pick up signs as to when the music is slowing down. The more in tune you become the more profits you will book.