Pin It

5 Tips on Trading Penny Stocks

Info_lover | May 8, 2010 |

0 Comments | Rating: 0

Trading penny stocks can be a great way to start getting involved with the daily stock market. It is a fun and exciting way to experience the stock market. Day trading penny stocks will give you the same experience of day trading in the bigger market. The price swings can be huge and it is important that you equip yourself with the proper knowledge before you start to trade penny stocks. Below are 5 tips you should know before you embark on penny stock trading.

Trading Tip #1: Always Use Limit Orders

By their nature, penny stocks are very thinly traded. As such, the bid spread (deviation between buy and sell prices) can be very large. Investors that use market orders can be manipulated by market makers looking to make a quick buck. The use of limit orders prevents the market maker from buying or selling at any price. In other words, buy or sell penny stocks on your terms, not the market makers' terms.

Trading Tip #2: Always Trade during Regular Hours

This rule goes hand-in-hand with limit orders. An absence of volume can result in after-hour trades that make little sense and most certainly do not represent an efficient match of buyer and seller. With penny stocks, even a few pennies' difference can make or break a trade. My advice is to stick to regular trading hours in order to elicit the most efficient trade.

Trading Tip #3: Do Not Chase Trades

The biggest mistake I see investors make is to chase a trade. For whatever reason, some investors choose to buy only after a stock moves higher. When a stock takes off, these folks decide that the waters are safe to participate. Nothing could be further from the truth. In many cases, by the time you decide the water is safe, the opportunity is gone. Losses then follow. This effect can be magnified with penny stock trades that can move very quickly one way or the other. In order to avoid this investing mistake, you should always stick to new recommendations and the buy limits that come with them.

Trading Tip #4: Buy and Sell for a Reason

This may be overstating the obvious, but it is surprising how many people buy and trade penny stock simply because they are moving. Investors need to understand exactly what it is that they are buying and why they are buying it. It is ok to own a stock that has already increased in value as long as there is a good reason to do so. I call these reasons triggers. A stock without a trigger can never take off.

Trading Tip #5: Always Preserve Capital

You must preserve your capital by never risking more then 2-5% of your account balance on any given trade when you do online penny stock trading. All successful traders follow this rule. You should do the same. Day trading penny stock can be highly risky, and following this rule will protect you so that you can live to trade another day even if you have made a few bad trades.

Before you start trading penny stocks, you should know that that you are going to lose money once you make it into the real stock market. This is a fact. It is going to happen. But, it is ok. Everybody loses money in the stock exchange market. The trick is for you to limit your losses, and maximize your gains. Even the most experienced traders will lose money on the market. But it is ok to lose money. You will have bad days, and you will have good days, but you cannot let the fear of losing money deter you from the market.

The good news is that the more you practice trading in penny stocks, the more confident you will be. This is a key part of trading on the stock exchange. You cannot be timid, you have to take risks.

If you want to be successful in trading penny stocks online, then you need to be cautious and give yourself sufficient preparation. Always take the time to practice and do ample research on penny stocks you are interested in. The stock market can lose you a lot of money if you are not careful. But once you become experienced in stock trading, your profitable stock trades can be a very lucrative source of income.