If you have been trading penny stocks for awhile now, you probably visit some message boards. My “go-to” board is Investors Hub because it is one of the biggest boards for microcap stocks. While these boards can be a helpful part of your trading strategy, they can also be detrimental to your success if you do not know how to analyze the information available. Some people will tell you to just ignore message board banter, but I disagree. I think it is important to analyze the discussions because it gives you some insight into market sentiment, which I discuss in this post.
I am going to go over some things to look out for with these message boards, as well as some of the different characters you will see on these boards.
Meet the Gang
This isn’t everyone, but it’s a lot of the main players. (Yes, I am using animated characters)
The “Hype” Guy
Why they’re good: They can help support a run on the way up and get others enthusiastic about a company. Essentially, these guys are marketers that help market the stock.
Why they’re bad: They run out of credibility very fast by continuously pumping different stocks. Their job is to hype companies and they ignore price action. A lot of the times the hype is not based off of anything substantial.
What to look out for: It’s nice to see hype guys on a board for a stock you own. Essentially, you have someone marketing your stock for you, which may lead to higher gains. Just remember to never actually listen to anything these guys say. They have their heads in the clouds. Do your own research but know that the hype guys can help support a positive sentiment towards a stock.
Why they’re good: Bashers can balance out the hype guys. Sometimes, bashers are realists that can negate the wild fantasies of the hype guys. Additionally, the bashers can sometimes scare people into selling their shares, which can drive the price of a stock down, allowing you to buy cheaper shares.
Why they’re bad: Most bashers are not trying to help anyone; they are trying to see the stock price drop. A lot of their claims are unsubstantiated and they can panic investors. Having bashers in a stock you’re involved in can make it difficult for the stock to run at certain times.
What to look out for: Look for how many bashers are involved in a stock to see if they are the minority or majority. You should be cautious when there are more bashers because they can create a negative market sentiment that may lead people to sell their shares in fear.
The Technical Analyst
Why they’re good: They can add some decent insight to the boards every now and then. This insight can be used to time entries and exits, however, you should not be looking to others for help with that.
Why they’re bad: Most technical indicators do not really matter for low volume penny stocks. Most people use reverse logic to prove their point. If someone wants the stock to run, they will look for indicators that support their theory.
What to look out for: Do not listen to a thing they say. Technical analysis is already tricky for penny stocks. Don’t listen to someone who has absolutely no credibility. If you want to use technical analysis, develop your own system. These guys are wrong about their analyses more often then not.
The High Roller
Why they’re good: High rollers can get a good crowd involved with the stock. Real “high rollers” will bring a lot of capital into a stock, which should be reflected in the stock’s volume.
Why they’re bad: Most high rollers are not actually high rollers. You don’t know anything about them or their lifestyle. Often times, these guys like to trade in groups (similar to pumpers), which means there is front loading and many people will get burned when the run is over.
What to look out for: Check a person’s reputation. See how their last couple of picks played out and analyze the validity of their previous claims. If you follow these guys, which I do not recommend, you want to make sure you time your entries and exits precisely.
The New Guy
Why they’re good: New guys can sometimes be led to invest in anything. They buy into the hype from the hype guys which can help support a run. We’ve all been here before.
Why they’re bad: Newbies often waste space on boards by posting meaningless content. They may also believe that they are more experienced than they actually are. This makes it harder to properly analyze message board posts.
What to look for: Look for people who are exceptionally emotional. These are the new guys. Be aware of the fact that their posts have little validity. This isn’t meant to be rude; we’ve all been here before. You don’t really need to look out for newbies as they don’t affect the trading too much, however, it is important to know when someone is a newbie so you can understand where they are coming from.
The Rare Unbiased Analyzer
Why they’re good: First of all, an unbiased poster is extremely rare. These people are good because they create real discussion about a stock. They analyze both the positives and negatives and give weight to both. These traders can help you think about stocks from a rational, emotionless perspective.
Why they’re bad: Sometimes being unbiased means sharing negative facts about a company. This can lead to a strong negative market sentiment because the posts are valid and cause concerns.
What to look for: Make sure someone is really unbiased. Look over their previous posts and see what they have said in the past. Also, keep in mind that a rational analysis does not guarantee that a stock will behave in a certain way. Just because someone is unbiased doesn’t mean that they are right. Use these posters to understand a company better and to improve your own due diligence process.
What to Look Out For
The Power of Posts – It almost seems a bit silly to do an entire post about message boards on a site about trading/investing. Do the message boards really matter? In my opinion, yes. Message boards can be extremely powerful because they can influence people’s trading/investing styles. Think about it, if you go to a board with nothing but positive comments, wouldn’t you be slightly more inclined to invest than if you went to a board with nothing but negativity? I’m not saying to make trades solely off of message board posts; that would be stupid. I’m saying you should use message boards to help gauge the market sentiment surrounding a stock. It’s a great tool. What better way to get into the minds of other traders? You will also want to keep in mind that everything posted carries some power. If you post something negative, you risk driving the price down. No, there is not a direct correlation, but you have to understand the power of your words. If you say something that deters one investor, that could have an effect on the stock. For example, whining about a company that you currently have losses on is foolish because you may scare away other investors. A lot of penny stocks have extremely low volume, meaning that there are few traders involved. While message boards won’t affect the prices of big board stocks, they can certainly influence the prices of low volume penny stocks.
Ulterior Motives – Anytime anyone posts anything on any board, they have some sort of motive. Sometimes, these motives can be as innocent as enjoying a conversation with other investors or making the trading day more interactive. More often than not though, people have an ulterior motive. If they want to see a stock price go up, they start talking positively about a company, and if they want the price to go down, they start talking negatively. Be careful when trying to make sense of all of this and think about why someone would post something. Remember, posting takes time and time is valuable. People need to have a reason to post. No one is out there trying to make you money. They are trying to make money for themselves. Keep that in mind and ask yourself why some people post what they do.
The Credibility of a Poster – The great thing about message boards is that all previous posts are easily accessible. If you are even thinking about listening to something someone says, you will want to make sure they are credible. Look at their previous posts and compare them to present results. If someone was hyping a stock and it dropped considerably, they are no longer credible to me. Similar to how historical data on stock charts can help show the future, historical posts from message board users can do the same.
Price predictions – Never listen to a price prediction: simple as that. No one has any real way of knowing how high or low a stock will go. Even when I am bullish on a stock, I don’t make price predictions because they would be unsubstantiated. Only the market can decide how high or low a stock goes.
Doomsday Predictions – People love to spread panic on days when traders are already panicked. When a stock is down, people will begin talking negatively about a company, making investors wonder why they invested in the first place. Feel free to analyze these predictions, but know that most of them are just made by bashers who are kicking investors while they’re down. They want to drive the price down because they are short the stock or want to buy in lower. These doomsday predictions will disappear the second the stock shows any sign of strength.
Fairweather Traders/Hindsight Analyses – This is a HUGE aspect of message boards that can be taken advantage of. People tend to change their opinions on a stock relative to its price action. If a stock is up, everyone is enthusiastic about its future. If the stock is down, everyone starts making doomsday predictions and finding all of the negatives about a company. Don’t get sucked into this emotional whirlpool. Be the person who can keep their eye on the prize. If you invested in a stock, you should have a good reasoning behind it. Don’t let that rationale falter when the stock drops in price. Of course, you should react accordingly, but don’t change your entire view on a company. The people panicking during the drop will be the ones rejoicing during the spike.
Reverse Logic/Technical Analyses – A lot of people make up their mind about a stock and begin finding evidence to support their opinion. This is the exact opposite of what the due diligence process entails. Watch out for posters who have a strong, biased opinion and will use any information to support it. People will use anything from technical indicators to fundamentals to prove why they made the right choice. You should be looking for ideas that challenge your own, not blindly falling in love with a company.
Fundamental Valuations – There are a lot of fundamental valuations posted on message boards, some more substantiated than others. I’ll admit that I do fundamental analyses during my due diligence process, however, I never accept the findings as concrete proof that a stock will run. The market can easily ignore fundamental analyses, and it will for a majority of stocks. After all, most penny stocks should be worth $0. Use fundamental analyses as a fallback to a more solid trading plan and ignore hyped up analyses by others.
Conspiracy Theories – These are my favorites. When a stock is doing really well or really poorly, people start trying to make something out of nothing. They will go to great lengths to talk about potential deals a company could have, or potential reasons for their demise. “Just wait and see, this company will announce a deal with Apple soon.” No, they won’t. If something seems too good to be true, it is. Unless something is backed up by solid facts, it is garbage. Don’t invest based on “maybes.” Invest based on cold hard facts.
CEO Hate/Love – This is one of the most ridiculous ones I see. I even did a post on it. People love to act like they know a CEO personally. They think the CEO is watching out for them or that the CEO is pure evil. Don’t listen to either of these. The fact remains that you don’t know the CEO personally. They may be a great person, or they may be a great con man. Additionally, a lot of things may happen that a CEO has no control over. Once again, focus on the facts and ignore anything that may seem unsubstantiated.