Penny stock trading can be a great way to make money. However, if you are not careful with what you are doing it can also be a way to quickly lose money. Trading your own account is fantastic but you must realize that the majority of those that trade their accounts lose money. I have seen figures that place the percentage of those that lose money at more than 80%. It is interesting to note also that the number of traders to say that they don't have a system to follow based on trading rules is also north of 80%. Hmmmm. Maybe there is a correlation there. The fact is that there is a correlation. If you want to be successful at penny stock trading then you definitely need to follow a set of penny stock trading rules. Although the list is far from inclusive, below you will find three penny stock trading rules that you must incorporate into your trading.
Find a Penny Stock System To Your Liking and Stick to It
It is not necessarily important what penny stock system that you decide to trade but what is important is that you stick to one. You can make money with just about any trading system out there if you can simply exercise discipline and stick to the plan. I primarily enjoy trading penny stock breakouts and pullbacks to significant moving averages. But that is me. You might be different. Find a system that fits your personality and stick to it.
Â There are a few elements that need to be a part of your system. You need to determine what is going to signal you to take a trade and what is going to signal you to exit a trade. This is a non-negotiable. I have defined parameters for the breakouts that I am willing to play. When I see a breakout I will enter a position. I also know what will cause me to exit the position. The moment that I enter a trade, I know exactly what will get me out of the trade. I have a journal that I keep in an Excel spreadsheet where I record each and every trade. The spreadsheet contains columns where I give the reason that I entered the trade, where I would take profit and close the trade assuming that the trade worked in my favor and where I would exit the trade if the stock moved against me. Then I have to execute that system. It will do you no good to write down all of these things and then to ignore them. You will not be right in every instance. You will at times take a profit when there was much more to come. You will at times close a trade at a loss when three days later you could have sold at a profit. But this is unimportant. What is important is that you don't allow yourself to take major losses and if you are following a system then this will not happen.
Â The second thing that is important when developing a penny stock trading system is to determine how much money you will allocate to each trade. I place about 10% of my account into each trade that I make. Some do more, many do less. I wouldn't advocate locking too much of your account into one position but you need to determine what you can stomach and what you can't. I also don't want to have to follow any more than 10 positions at any one time. That is why I place my position size at 10%. I still work a job and don't have unlimited hours to stare at a screen during market hours.
Â You will also need to decide if you will enter your position all at once or if you will stage your way in. Many traders prefer to enter Â½ of their position at one price and Â½ of their position at a different price. The choice is up to you. Just be consistent.
Don't Feel Compelled To Trade
You obviously need to trade if you are going to make money but don't force a trade. Many traders get bored and begin to enter trades that are not really there. They feel the need to do something and as a result they jump the gun. Let the trades manifest themselves. Don't try to determine what the stock's next move may be if it hasn't met your entry criteria. Once you put your system in place you need to trust it. When it gives you a signal you will trade. If it hasn't given you a signal you will wait until it does.
You should be able to write a reason that you took the trade in your trade journal. You should not be writing that â€œthe stock looked like it might break out.â€ It either did break out or it didn't break out. If it didn't break out (assuming this was part of your system) then you shouldn't be in the trade. It is as simple as that.
Â Do not feel compelled to trade. There are times that I have gone a couple of weeks without making a trade because nothing looked good. If you are an action junkie and you just need to be doing something then penny stock trading is not for you. You will lose money. Stick to your plan and wait for you trade setups.
Keep Your Trading System Simple
My dad used to always remind me of the acronym KISS. He wasn't referring to the band. He meant â€œKeep It Simple Stupid.â€ I have found that in trading simpler is always better. I have seen systems that require 3 or 4 technical analysis indicators to all be doing something at the same time. Maybe I am just not the brightest guy in the world but all of that seems too difficult. Do not over complicate your trading system.
Â For the most part you should be able to develop a trading system that is based on price action that will make you a handsome return on your money. I have tried so many things over the years. I have tried to pick bottoms. I have followed technical indicators but ultimately I have come to believe the saying that I had heard but ignored for so many years: The Trend is Your Friend. Don't fight the trend. If the stock is moving up then trade it on the long side. If the stock is moving down then short it. If you don't like to short then ignore those stocks that are moving down.
Â Trade stocks that are above their 20 day moving average. That will give you an indicator of which stocks are moving up. It really doesn't have to be difficult. Keep it simple.