TM Editors Note: This article discusses penny stocks and/or microcap companies. Such investments are readily manipulated; do your own careful due diligence.

A lot of people want to become better traders. A lot of those people love to ask me questions like, “Tim, what should I focus on?” But few actually listen to what I have to say. Today I’ll discuss the warning sign traders never see coming.

Some of the biggest dangers in the market are actually pretty easy to see. So how is it that so many traders end up falling prey to them, deer-in-headlights style?

This is a lesson about what to focus on … and what to avoid. Are you ready to learn?

Stop Asking Me THIS Question!

If I had a dollar for every time someone asked me:

“Tim, how do you find the best stocks?”

I wouldn’t even have to trade to be a millionaire.

My answer is always the same: Look for big percent gainers.

Once I answer that those same people will ask:

“Big percent gainers over what time period?”

Any period!

One day, three days, five days, seven days, 30 days you need to scan for different time frames. Don’t be lazy. It’s super easy to scan for percent gainers with a stock scanner!

Look for Patterns

Here’s a good example of a recent play: Discovery Gold Corp. (DCGD) I’ve traded this ticker over a dozen times, and so have many of my students.

When I posted about a recent profit trading this penny stock, Profit.ly user rickyc9 was in tune:

“Did same trade, very nice!”

So was Gld2mine…

“Thanks Tim Bought DCGD at 1.15 and sold at 1.30 10% profit. Saw resistance at 1.31 so took meat of trade.”

AND mcrae1…

“Made a decent profit on this stock today too bought in at 1.15 sold at 1.36.”

therealmcdougal was on the same page, and learned from a newbie mistake:

“thanks Tim, nicely done. I’ve been watching DCGD today… waiting for the right time to paper-pounce… I got in at 0.91 but forgot that OTCs do not trade after hours, so unfortunately I’m stuck now! Good lesson for me to learn while paper trading, rather than w/ real money…”

When people want to know why I’ve traded this stock so many times, the answer is simple: it fits my pattern to a T.

I don’t have a ton of tolerance for people who feel the need to ask why I make trades, because if they’d really studied hard, watch my videos, and read the material and resources that I put out, it would be pretty easy to see this is a classic setup.

I’m always going to focus on stocks that fit my patterns! I don’t worry too much about selling too soon. I don’t care if I’m repeating the same trade over and over. If it fits my pattern, I’m ready to trade.

So what’s going on with DCGD? Well, it’s been up from a quarter of a penny to over $2 per share.

Why focus on a penny stock like this, and what is the thesis of my trade?

OK, so this stock is up thousands of percent even though volume is fading.

The company claims they have nothing to do with the inflated price. They say they know nothing about what’s going on with the promoters.

Does this mean they’re on the up and up? No. But I don’t care.

I’m not interested in the company, what they say, or what their press releases say. I’m interested in the pattern.

Read Between the Lines

People will say things like, “Isn’t that a bullish sign that it’s still holding up at thousands of percent?”

No. You’ve got a stock that’s up thousands of percent, but there’s no good reason why.

It’s on the back of promotion, and once that promotional effort ends, this stock is dead.

Promoters are idiots. You might be a newbie, but you don’t have to be an idiot. Don’t get brainwashed on plays like this. Don’t fall into the trap of believing that this company is going to change the world.

I mean … sure, they could change the world.

But realistically, the odds of them failing are far higher, like 99.9 percent. They do have a chance… but I’m not trying to find the diamond in the rough.

The Problem With Penny Stocks

This is one of the biggest problems with penny stocks. People start to believe the hype. They fall in love with the story and start believing in the company. Then they start to think that one day this stock will get ahead. Then… SNAP. The trap shuts, the stock tanks, and they lose the shirt off their back.

I’ve seen the same thing over and over again.

But if you listen to what I have to say, and listen to my lessons, you’ll see that this in and of itself is a predictable pattern. Here’s what happens: The companies claim ignorance. They say the short sellers are to blame. But that’s suspect. Usually, there aren’t even that many shares to short.

This phenomenon is extremely common, and it represents all that’s good and bad about penny stocks. It’s possible to take advantage of this pattern.

Profit.ly user Kriminator knows the score:

“I’m starting to trust these sketchy plays, and I really appreciate how you explain your reasoning behind why it was in play. I’m noticing the same things your explaining, so, it solidifies my thinking process. Thanks Tim!”

Check out the Men’s Journal article where I talked about “buying high.” I didn’t know per se that the weed crash was coming, but it was following the same pump pattern!

It’s the patterns I look for. I’m not in it for the companies. Sorry.

I’m not interested in these stocks, but in the charts, and the patterns they create.

Protect Yourself

I’m not heartless. I’m not saying I want the companies to fail when I short. I’ve never shorted DCGB. It looks like a scary stock to short. I’ve been buying first green days and dip buying morning panics. I don’t want to teach you to wait for stocks to go higher. I want to teach how this game goes and how the pattern works. I want you to make smart decisions and to cut losses quickly!

The best way to protect yourself is to educate yourself. Learn how the market works, and observe predictable patterns.

This is one of the biggest things I emphasize and it’s one of the most important recurring themes when I write.

The Bottom Line

Low-priced stocks getting hyped up and inflated? It happens all the time. Here’s how it goes: it gets halted, there are disappointments, people get bitter. And yet, every time, it comes as a surprise to traders who haven’t learned their lesson.

There’s a reason why I call myself a glorified history teacher. In the stock market, history repeats itself. Over and over.

Any company with promotion is probably going down in flames, because they’re more interested in getting the stock price up than actually investing in the company. The overblown promotion in and of itself should tell you something about the promoter’s priority and act as a huge warning sign!