- Timothy Sykes learned how to trade penny stocks after observing repeated chart patterns.
- He now teaches students to identify and trade the largest percentage gainers.
- He makes one to two trades a day during morning spikes or dips.
For most of 1999, Timothy Sykes spent his senior year in high school recovering from surgery after a tennis injury.
Exempt from school work or playing sports, he had a lot of time on his hands. That year, the stock market was making headlines due to investors' excitement about internet companies. The hype grabbed Sykes' attention.
He wanted to bet on the stock market with his Bar Mitzvah money of roughly $12,000. The gift had been sitting in series EE bonds, a low-risk investment vehicle. His parents assumed he would lose it all but didn't stand in his way because they thought it would be a good early lesson about what happens when you speculate, he said.
At the time, there was no pattern day trading rule, which meant he didn't need a minimum of $25,000 to day trade. With little strategy, he started buying random companies, mostly larger names that didn't budge very much. He recalled losing at least 50% of his bets in those early days.
He eventually discovered that most of the big gainers were small internet companies. The first time he spotted a repeating pattern was after noticing that brands that added ".com" to their names would see their stocks rally. He recalled testing the assumption and making money on several companies, including a camping-gear retailer called Sportsman's Guide.
He also noticed repeated gap ups, when a stock opens above its previous-day closing price, mainly between Friday's close and Monday's opening. During his college freshman year, he tried his weekend theory on a company called Illinois Superconductor Corporation after it announced positive news about a product.
Sykes says he was blissfully ignorant when he started trading but got lucky because he began at the right time: shortly after the 1998 market crash and a rally that lasted well into 2000. It's what many of the retail traders who started in 2020 also experienced, he said.
Insider viewed the IRA accounts Sykes trades in. Norman Zadeh, founder of the United States Investing Championship, also reviewed Sykes' statements, and said his gains between 2020 and 2022 totalled 630%.
Today, Sykes' income comes from his online program "Millionaire Challenge," in which he teaches others how to become traders. While he still day trades, he donates his gains to charity and he uses his trades as live lessons to demonstrate his framework.
Among some of his top students are Jack Kellogg, who made $8 million in two years, and Kyle Williams, a 26 year old who made over $2.5 million in 2 years.
But not everyone becomes a millionaire from trading. Sykes says most traders lose for various reasons, including lack of preparation, trading without sticking to rules, overtrading, leverage, and large position sizing. He's also not sure what percentage of his students become successful. He compares his program to a gym membership, where the majority of those who sign up don't succeed or follow through.
The teacher's strategy and patterns
People think there's an exact formula or a list of hot stocks to trade. Neither is true, he said. It's about understanding the process, your trading style, and adapting to the constantly changing environment.
Even amongst Sykes' students, who are taught to spot the same pattern, there are different trading styles. Students adapt bits and pieces of his courses to their system.
His own approach is based on a pattern he terms the "Pennystocking Framework," which tends to play out when penny stocks or small caps rally by hundreds of percentages.
To detect the start of this pattern, he puts together a watchlist of the biggest percent gainers from the trading day, usually those that are up between 30% and 200%. The list could also include the largest gainers from the previous 10 trading days but the longer-running stocks should be in a hot sector like AI, he noted.
He also scans for breaking news before the market opens. The watchlist could be between 10 to 15 stocks. In 2020 and 2021, that list was up to 30 stocks because the market was volatile and there were many stocks that rallied. He also shares his list with his students but it's up to them to determine the stocks and setups to trade based on whether they prefer to short or long.
Sykes looks for stocks that break out convincingly. While it's not an exact science, if a stock has exceeded its previous day's total volume with a technical breakout of 5% to 10% over its previous highs, it's a strong contender. To avoid chasing, he waits for the stock to retrace to its key breakout level before buying.
Another trade he enjoys making is selling into the first green day after a news catalyst. The best ones happen when a company makes an announcement on a Friday. Sykes likes to take a position that day to sell the following Monday when many retail investors are buying.
"My best-performing strategy right now is over the weekend because the stock market is closed over the weekend. So my inpatients can't get to me. And I oftentimes have a 10, 20, 30 percent gap up on that Monday," Sykes said.
For example, on June 24, 2022, a Friday, he purchased shares of Evofem Biosciences (EVFM), a small company developing a female contraceptive product, at around $0.38 to $0.39 a share. It was the afternoon when headlines about the Supreme Court overturning Roe v. Wade broke. He held for the weekend and sold on Monday at around $0.60 a share.
His favorite pattern is the morning panic, which could happen if a stock has been up for five to 10 days and suddenly has a 20% to 50% drop. This plunge often occurs because market makers can see stop losses, prompting them to sell shares or sell shares short to trigger those stop-losses and create a domino effect of sales, dragging the price down. Once a key support level has been reached, there's usually a bounce back which Sykes likes to buy into.
For example, Tesoro Enterprises (HMBL) underwent a merger With HUMBL, a company that began to expand internationally. Sykes noticed the stock was being heavily promoted. On November 30, 2020 the stock plunged and Sykes bought into the morning panic dip at $0.14 a share and sold at around $0.15 to $0.18 a share.
While Sykes will trade any stock that fits his setup, his preferred sweet spot is stocks that are trading between $2 to $4 a share. Anything below that range increases the risk because it's more speculative, he said. Stocks trading above that range have institutional traders, which makes pattern prediction trickier because you're betting against algorithms and more sophisticated traders who Sykes doesn't want to compete with.
While many of his students prefer to look for the most active names trading hundreds of millions of shares daily, overly liquid stocks are too choppy for him. So he sticks to lower-volumes stocks that trade an average of one to five million shares daily. Low trading volume could indicate that he's early. As more people learn about the stock, the volume could increase over the next few days.
He makes most of his trades within the first hour of the market's opening. From there, he could spend a few minutes to two hours holding a position. That's excluding Fridays, when he may trade in the afternoon to take advantage of the weekend gap ups.
Unlike many traders who add to a winning position, Sykes prefers to scale out of a winning trade. He calls it "trading scared" and admits he has missed out on more gains by exiting early but prefers the safe approach.
He estimates his win-to-lose ratio is around 70/30 but believes that half his losses came from cutting out too early. Even if the pattern reverses, he rarely reenters the same trade to avoid revenge trading. He said that holding a position in hopes that a pattern will reverse creates a habit of breaking your rules. And one day, a small mistake could turn into a big disaster, he noted.
Another way he mitigates risk is by limiting his losses to 1% to 3% on his overall position.
"I never use hard stops because the market makers can see your stops," Sykes said. "And oftentimes market makers in penny stocks see all the stop losses at a round number. They swipe all the stop losses out and then they put the stock right back."
A trader's volatile reality
In 2003, Sykes' decided to start a short-bias hedge fund while still in college called Cilantro Fund Partners, which mainly shorted penny-stock scams. He did well between 2003 to 2006.
But his streak ended after a single trade in 2007 wiped out his previous three years of gains. He made the mistake of getting excited about a print-at-home ticketing company and invested a third of his fund in a long position.
The company went bankrupt and Sykes shut his fund down in 2007. That same year, he was featured on "Wall Street Warriors," a TV series that followed the lives of fund managers and traders.
"So everyone was congratulating me. But because I couldn't talk about my performance openly, no one knew that I had this big loss. So I was really conflicted, and that's what led me to teach," Sykes said.
The heavy loss his hedge fund took eventually went public, with one Reuters headline reading "Failed hedge fund manager tries again on Internet, It felt like a punch in the gut, he said, but the press pushed him even harder to want to succeed.
The uneasiness that comes with having an income pegged to the stock market never goes away. Today, Sykes' concerns are mostly about the macroeconomic environment.
"I'm fearful of the economy. I'm fearful of our debts. I'm fearful that we might have a lost decade," Sykes said.
He added: "And I know that while it's very exciting right now that I have had so many millionaire students in the past few years, again, a lot of it is just due to the bubble and people being in the right place at the right time. If we have a lost decade where let's say the market doesn't do well, I don't think many of my students will stick around."