Top 10 Tips For Trading A Promoted Stock
1. Determine if the stock promoter has a good or bad reputation before buying.
Like anything else, there are promoters who provide a window of opportunity to profit and there are promoters who will trap their subscribers in trades which always result in losses. It should be noted that there is a very small ratio of good promoters to bad promoters, a reasonable estimate is 1:10.
2. Recognize that once the promotion is over, it is almost certain that the share price of the promoted stock will drop to price levels at or before the promotion began.
One of the skills needed to successfully trade a promoted stock is choosing when to sell. This choice should be a point in time before the inevitable mass sell-off by the promoters and other traders who purchased at higher prices.
3. Never believe the hype found in promotional newsletters.
It is tempting to believe that the company being promoted is about to deliver a truly fantastic product to the market. It also tempting to believe the promoters when they say the company's share price is about to take off because of this fantastic new product.
Trusting a stock promoter's claims is always a bad choice and will result in loss of investment.
4. Set limit sells immediately after buying.
It is important to set your limit sell orders as soon as your have had your buy order filled. If you happen to buy into a good stock promotion, the share price will increase very fast and it gets harder to convince yourself to sell when you see your potential profits steadily increasing. Set a limit sell at a certain percentage gain over your buy price and lock in the gains when your sell orders get filled. Our free tool TradeSheet was designed specifically to help traders determine exit points based on their entry prices.
5. Realize that a stock promoter will use many different names or aliases.
Promoters typically use several different names or aliases. By using several aliases the promoter aims to mislead investors by claiming that a stock is receiving attention from other stock promoters when in fact it is the same promoter operating under several different names. It is important to determine which aliases a stock promoter will use during any given promotion.
6. Always read the stock promotion's disclaimer.
By SEC law, all stock promoters must disclose any and all compensation they receive for their promotional services. This disclaimer can reveal important information the trader can use to their benefit. If the stock promoter has been compensated in shares of the company's stock, then the trader can expect that there will be large blocks of shares being sold sometime after the promotion begins. If the promoter received cash compensation, then the trader can expect the stock promotion's length to be propertional to the amount paid.
Be sure to read about SEC rule 17 (b).
7. Never think you are the first one in.
No matter how fast you get your buy order filled, there will always be someone who got in at a much lower share price. Stock promoters are typically compensated in shares of the company's stock before the promotion begins. This allows the promoter to sell into the initial buy-volume that the stock promotion is expected to generate. If the promoter wants to cash out quickly, they will do so at your expense.
8. Learn to recognize when the window of opportunity has passed.
There is usually a very small time-frame that allows for a profitable trade. With most stock promotions this window of opportunity is during the first few minutes after the opening bell. The share prices of stocks that are being promoted typically make their most significant moves as soon as the trading session opens or after the first newsletter of a new promotion has been released. This first session is known as the campaign initiating day. Learning to recognize the most opportune time to take a position, and recognizing when that opportunity has passed, is a skill that must be developed in order to profit from these plays.
9. If you happen to hold your position for an extended period of time, you must invite the possibility that the promoted stock may be halted.
Although this is uncommon, it is not unheard of. A combination of poor financial reporting by the company mixed in with a stock promotion will draw the attention of SEC officials. If the stock does get halted, expect a large sell-off on the first day after the halt is lifted. This sell-off after the halt will typically continue for several days, weeks, or even months.
10. Do not trade promoted stocks without sufficient trading experience.
Trading promoted stocks is risky because of the heavy influence stock promotions have on share price. Unless the trader has many years of experience trading in the OTCBB, or they use a tool such as OTC View they should avoid all promoted stocks.
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