“While there are no rules of trading written in stone, it’s best to follow some predefined rules and guidelines that you can set for yourself.”
It’s important to note that the penny stock market is similar to the Wild West before it was tamed. There are countless risk lurking behind every corner. It’s a good idea to assume that most everything you read or hear about a penny stock are half truths at best.
Most penny stock companies do not succeed or reach their goal. Many penny stock companies rarely last 2-3 years before getting rebranded & packaged as something else. This is a very important concept to learn and as a result, most long-term trading strategies do not apply to penny stocks. Generally, only short-term strategies which are based on technical and boosts in liquidity prove to be profitable.
Another important factor to consider is the inherit risk involved with trading penny stocks. Penny stocks generally are subject to low liquidity and a small micro-cap. These factors facilitate an environment for stock manipulation and large price swings. Considering the short period these companies actively trade before dissolving, this will mean that most penny stocks will almost always only make short-term upside moves, and will generally never recover from downward moves.
It’s smart to only make small investments in penny stocks. Penny stocks should never be a substantial part of an investment portfolio and should be considered an extremely high risk investment. Trading penny stocks is not for everyone, never invest in a penny stock unless you can afford to lose that entire investment.
A few simple guidelines to follow are listed below.
Entering a Position
Choose a price you wish to enter and stick with it using a limit order. It’s generally not a good idea to use a market order. Market orders allow the trade to be placed at an undetermined price and can lead to poor fill prices.
Don’t chase the stock. Remember, if the stock moves past the price you had hoped for, there will always be another opportunity around the corner. The last thing you want to happen is to over-pay for a position because you feel like you’re missing out.
Watch the Open
Observing how a stock trades is important. There are many indicators that can provide crucial information about how a stock will react. Look out for stocks that are trading on substantially higher volume but are not moving in the direction you want.
Minimize Your Losses
You must determine how much of your investment you are willing to risk when you enter a trade. Remember to stick with that number if the trade goes against you.
Do not trade based on emotion. Most large losses generally start as a small loss. As an investor, you will most assuredly have trades that work against you. A seasoned trader knows how to limit his losses by conceding a small small loss instead of holding on hoping for a stock to turn.
Sell on the Way Up
Just as you should determine the amount you are willing to risk, you should also determine a reasonable amount you expect to gain. It’s much easier to sell a position when their is a greater demand for the stock. When a stock price is falling, there will be other investors who are also attempting to sell their position. This selling pressure actually works to drive the stock price even lower.
Get used to taking a profit, no matter how small. In fact, a novice trader may want to focus on making small gains which are much easier to achieve than risking an their investment for larger gains.