First I'd address your last question first: while playing Limit will reduce your swings to less stressful levels, it will also greatly hinder your ability to profit at the micro stakes. If you're crushing $50/$100 Limit then yeah you can make a living at it, but at micro stakes? There's just way too much effort and too little reward there for me personally. Which is a problem with micro stakes in general, if your goal is a decent winrate and profit. The penny stakes you're at are little if any removed from
freerolls, as far as quality of play goes. When you're the only "real" player at a table, it's exceedingly hard to succeed consistently due to the insane variance at these levels.
The general consensus is that you look at moving up when (a) you are crushing the game where you're at, and (b) you have sufficient
bankroll for the level you want to move to. Another important consideration is what the game means to you. Are you just looking to play recreationally for the fun of it, or do you intend to become a real student of the game in the hopes of profiting? Those tend to be mutually exclusive goals for most people.
Crushing the game at freeroll/penny stakes is incredibly hard even for a solid player, due to the extreme variance involved from the high concentration of bad players. Yes, over a very long term you can win more than you lose, but it's excruciating and IMO a hindrance to growing as a player.
IMO (and I'm sure some will disagree, no doubt much better players than me), you really can't start reaping the fruits of your hard work as a student of poker until you get to the 50NL (.25/.50) level and higher. If you can crush this game, then you're well on your way to making some decent additional money. Maybe not as a full time job, but to the tune of at least a few hundred per month if you play only a moderate amount.
As a suggestion based strictly on my own opinion and experience, if you feel you have a decent game but just can't stretch your legs due to the overwhelming number of bad players, then work to establish a bankroll that will allow you to move up a few levels from the penny stakes, say to the 25NL (.10/.25) level. By convention this would dictate a bankroll of at least $250 (10 buyins at 100BB each), some would say more. You could make a deposit when you have the spare cash, or keep grinding until you get there, or a combination of the two. If you're like me, your bankroll is somewhat open-ended and fluid -- if I ever take a big hit, I might drop down in stakes, but most likely I will just deposit enough to bring it back up to where I want to play at. I can afford it, but I understand others can't, or don't wish to, so they play strictly with what they have in their poker account and no more, in which case strict BR management is much more critical.
The variance will still be high at 25NL and 50NL because you will still find fish at any level (there are some very wealthy fish in the world who love to give away money hand over fist if they're having fun, and that's who the pro players typically live off of), but it will be much more tolerable than at the bottom-feeding levels and will progressively get better as you advance.
The crucial thing though is not to move up further from there until your game and BR are ready.
Oh, and back on the subject of Limit vs NL: if you're moving from one to the other, it's very important to recognize the difference between limit and NL strategy, as it's a significantly different game. Don't assume that because you do well in one, you'll automatically jump in and do well in the other.
Keep in mind this is my own $0.02 and you'll no doubt get 20 different opinions from the next 20 people to post, some of which might call me crazy. Some folks here are pretty passionate about giving the "right" advice. Forewarned is forearmed, or something like that...
