Everybody fashions themselves as a trader. Well, at least everyone who has ever had a brokerage account. Most are convinced that they could trade their account effectively. The truth is that they are right and they are dead wrong all at the same time. It is true that anyone would learn to trade penny stocks successfully if they learned and then followed several key pieces of advice. However, most do not. They trade by the âseat of their pantsâ rarely, if ever, having any systematic way of picking stocks that they plan to trade.
Â Of all of the lessons that I have learned from trading over the years there is one that stands out more than the others. You cannot afford to have an ego when you are trading. You will be wrong (at least from time to time), so get it through your head now. When I began to understand this concept, I began to trade more effectively. Unfortunately, there are many thousands of dollars in losses that can occur before one learns this lesson.
Â The interesting this is that if you had asked me years ago if I thought I would pick nothing but winners I would have given you a resounding âNO.â I would have expected nothing better than 65% winners. However, although I gave mental ascent to that idea my actual trading practices seemed to indicated otherwise.
Don't Fall In Love
Penny stock traders have a tendency to fall in love with their picks. They view it as an assault on their skills as a trader if a pick goes terribly wrong. They rationalize to themselves that they just entered the trade too early. It wasn't a bad pick it was just a matter of timing and execution of the trade. In other words, their ego is too big to admit that they made a mistake. Not every pick can or will end with you crossing the finish line with your arms held upward in victory.
Â I recently read the story of the well known trader Marty Schwartz. It struck me that he said that his best trade ever was the day that he swallowed his pride and took a $6,000,000 loss. Ouch. He could have reasoned why he should have stayed in the trade but instead he took the loss and moved on. Had he stayed in he would have lost millions more and would have probably been out of the game.
Â Many traders can't do that. They believe they were right. If they felt the penny stock was a good buy at the price they bought it at then it must be even a better deal when it is 10% lower. So they buy some more. When it is 20% lower they reason that it is now an absolute steal so they add more to their position. They do this despite the fact that their money management system tells them that they shouldn't commit this large of an amount to any one particular trade. When it is 50% lower they are so scared they are unsure what they should do so they buy more. When it is 70% lower they puke and then well all the shares.
Â I wish that this was an uncommon scenario. Although the percentages may be different the outcome is all too familiar for so many traders. They allowed their ego to get in the way and it cost them a lot of money.
A Little Bit of Advice
Here are two pieces of advice for you to follow. Never double down on your position unless you were staging your way into a purchase. If you had entered what you considered a full position with the initial trade then you are done. Do not add more. Stick you ego in the drawer. It doesn't matter what you thought the penny stock was going to do. The only thing that matters is what it is currently doing.
The second piece of advice is to sell when your exit is triggered. Don't hang on. Move on. You will find something better. Don't lock up your money in a loser. Exit the trade and live to fight another day. Your ego will survive. Trust me.
Â Now, if you don't mind, I have a trade to go close out at a loss.