Why New Traders Should Avoid OTC Markets

Traders react in front of their screens at the Frankfurt stock exchange September 30, 2008. The European Central Bank lent banks 190 billion euros in its latest weekly auction of euro funds, with strong demand pushing up the rates of interest paid by banks to a higher level than analysts had expected.  REUTERS/Alex Grimm (GERMANY) - RTX92EE

Investing wisely can be a path to freedom. Financial freedom. Liberated from the need to live paycheck to paycheck, you can pursue your passions whatever you decide that is. The need for money to live is universal, but you can move past that need with the accumulation of capital. Day trading can be a great introduction to that path. But you need to be able to manage risk properly and move through the world of investing and trading with confidence.

Which is why you need to start by avoiding OTC markets. OTC markets refer to over the counter stocks that are sold by smaller market makers, not on the big and well-known exchanges. Commonly known as the pink sheets, these stocks were the centerpiece of the hit movie, The Wolf Of Wall Street. The way to make money in these OTC markets is to trade at a very high volume. The problem with that is the risk gets higher and higher as well.

OTC markets are also home to low-information stocks. The larger exchanges have very strict rules about how to engage companies and how much financial information they have to disclose. That means that you can find the information you need to make calm and reasoned investing decisions. In the OTC markets, you have less concrete information on these companies, so they can be subject to manipulation. It makes trading that much riskier,

Pump and dump schemes are common in OTC markets. That is where a market maker buys a large amount of one company and then employes marketing channels and sympathetic financial news outlets to talk up the value of the stock. So that the marks out there in the market gobble up the shares and drive the price way up. Then the market maker dumps all the shares for a high profit and the value plummets.

The way to avoid this situation is to stay away from OTC markets until you are good enough to day trade in there with confidence. You need to develop the strategies to spot trends and take advantage of the quickly and without hesitation. That means you need to be able to read the technical indicators and intuit where the price is going to go. The fast pace is intimidating to newbies and those without the requisite screentime.

Screentime is essential for becoming a profitable day trader. When you take the time to watch the market each day, learn the ways that the market moves and how to take advantage of it, then you should dabble in OTC markets. But that is very hard to do. Because the OTC markets can seem like the ideal spot to make a killing.

You need to be able to hit singles and doubles in the minor leagues before you get to be a home run hitter in the minor leagues. Practice is the key. So you need to spend time paper trading before you risk real money. Paper trading is where you use virtual currency in real-time, simulated market conditions in order to test out your trading skills. Veteran traders also use that to test out new strategies. It is a great way to get good at trading without putting your actual cash.