Trading penny stocks is inherently risky given the nature of the stocks involved. Some companies are likely weeks or months away from bankruptcy while others have a longer lifeline but little to no sales or a viable path to growth.
And then there are the penny stocks engaged in outright fraud or subject to pump and dump schemes.
Yet despite the poor reputation penny stocks have to offer the public, day trading has never been more popular. Behind all of the bad companies and schemes is an opportunity for traders to take advantage of notable price movements in a very short period of time.
Here are 10 rules to follow to maximize gains while trading penny stocks while minimizing the downside.
1. Be Fast In Taking Profits
Penny stocks will move fast in either direction and traders need to be agile and quick to respond accordingly. This means that small profits should be taken whenever possible because there is a very real risk that profits can turn to losses within seconds.
It is important to develop a strategy while trading penny stocks that emphasizes banking on many small gains. After all, 10 winning trades of just $30 a day can result in an annualized profit of more than $75,000.
2. Be Faster In Taking Losses
Perhaps more important than banking fast and small profits is to take even quicker losses. As soon as a trade moves in the wrong direction it is important to cut losses and move on to the next one.
The worst trait a penny stock trader can have is sitting and hoping a losing position reverses fortunes. Sometimes it does, but more often than not it won’t. Don’t let a $20 loss balloon into a $100 loss.
3. Don’t Be Afraid To Short A Stock
Short selling penny stocks consists of borrowing shares and simultaneously selling them in the market under the assumption they can be returned (i.e bought back) at a cheaper price. Short selling penny stocks can be a very profitable strategy under the right circumstances.
Of course, the same risk management rules apply for shorting a stock: cut losses early without thinking twice.
4. Free Yourself Of Any Distractions
Distractions can ruin a penny stock trader’s day. Some of the distractions to avoid are the more obvious ones like minimize background noise and find a quiet place to focus. Watching Netflix or listening to loud music in the background can prove to be just as distracting.
If a trader feels the need to take a break then they should do so after double checking there are no open positions or pending orders. Take as much time as needed and return back to trading with a refreshed and clear mind.
5. Take Care Of Your Trading Setup
A trader’s setup is the gateway to their livelihood and should be treated with respect. Invest in a comfortable chair and desk, clean your keyboard and monitors often, and keep the office area tidy. Trading penny stocks for a living is a privilege reserved for the elite few and should be reflected in how they treat their environment.
6. Commit To Learning More
The best penny stock traders are those that commit to learning more about their craft. Expert penny stock traders keep detailed logs of their trades to better understand where their profits and losses are coming from.
There is also no shame in admitting outside help is needed to perfect a strategy or develop a new skill. There is an entire industry of penny stock educators willing to share their experience and knowledge. Look for someone that offers some free tips on YouTube or social media to evaluate if they can offer excellent content behind their paywall.
7. Be Prepared For ‘That Kind Of A Day’
Every trader with no exception whether they trade penny stocks or large-cap stocks will have “that kind of a day.” You know what this means: a day when absolutely nothing goes right and everything goes wrong.
Even the most disciplined trader will go through a losing slump where three, five, or even 10 trades in a row result in a loss.
It is important to understand this will happen at some point and everyone should plan in advance for this scenario. Sometimes it is hard to get up and walk away for a few hours or a day. If need be, remove the cable modem to disconnect the trading platform from the internet and force yourself to take a lengthy breather, be it the rest of the day, a week, or a month.
8. Stick To Your Niche
Traders that find they are consistently more profitable trading biotechnology penny stocks should stick to their area of expertise. This doesn’t mean that all other penny stocks should be avoided, but it does mean a more cautious approach is warranted when trading unfamiliar sectors.
But as a golden rule that should never be broken for any reason, avoid trading large-cap stocks. A 1% move in the wrong direction in a stock like Amazon, Netflix, Tesla can wipe out months worth of gains from penny stock trading given the large dollar value of just one share.
9. Have An Exit Strategy
Traders should have an exit strategy in place for when to sell a penny stock. But perhaps more important is to have an exit strategy on when it is time to quit trading penny stocks for a living. Will this time come after a certain amount of money is lost? Perhaps it is a sign to move on when the sound of the 9:30 AM opening bell is no longer exciting.
For many penny stock traders, the time to call it quits will be obvious but others could struggle with this decision or months, if not longer.
10. Have Fun
Trading penny stocks is supposed to be fun. Few other professions offer the possibility to work a few hours in the morning and enjoy the afternoon off. The beauty of day trading is it can be done from anywhere.
Travel to a foreign country if possible and experience life to its fullest potential. Don’t be afraid to have a lot of fun.