The following is a guest blog post:

Penny stocks are stocks that are traded for less than $5, and they are known as ‘Penny stocks’ because they can cost as little as a few cents, or a few pennies.

Penny stocks are usually sold by companies who don’t have many real assets as they may not have been trading for very long, or they have recently had some financial difficulties.

Let’s take a look at 3 effective penny stock trading tips that could help you create an income from the stocks that could make you wealthy, or at least avoid losing your shirt:

Use Support And Resistance Levels

Some traders try to stay away from any form of technical analysis, but they could be missing out. Use support and resistance levels to help you gain an idea as to how well a specific stock is performing.

Support levels show shares that have fallen, before bouncing up again. If shares repeatedly behave this way, chances are they will behave the same way in the future.

This potentially means that if you buy shares at a low price, you can wait until they have bounced back up again before offering them up for sale.

Resistance levels refer to stock prices that always reach a high point before they fall back down again. The highest price usually creates a bit of concern among traders who may want to stay well away from any stocks that behave this way.

When you’re thinking of buying a penny stock, take a look at its performance over the last 6 months, so you can determine whether the stock peaks and then falls, or falls and then peaks.

Try to opt for stocks that have support levels, and consider selling just before they show any resistance levels.

Use Stop-Loss To Your Advantage

Stop-loss orders are those which help to prevent traders from losing too much money. A stop-loss order involves using a preset method that will sell your penny stocks should the price fall to a specific point below your purchase price.

Unfortunately, you cannot add a stop-loss to every penny stock, which means you may have to keep an eye on the stock and sell it once it has almost reached your purchase price.