Paradigm Capital Management suggests you to consider following points before trading penny stock:
1) Don't trade money you cannot afford to lose
Penny stocks are very volatile and can have major price swings both positive and negative in a short time frame. No one trade is guaranteed, so we must never trade money that we cannot afford to lose. It would be wise also not to bet your entire account on one trade as stock trading is a numbers game and we want to be around to fight another day no matter what the outcome of any one trade.
2) Trading without a plan
For every trade you must have a plan before you enter. Once you are in a position the emotions of trading can take control and cloud good judgment. So its important you have a clear profit taking price and stop-loss price. Also know your reason for being in a trade so you will see if that reason is no longer there and it's time to exit.
3) Trading without stops
As soon as you are filled in a trade you MUST put in a stop-loss order. This is especially true for penny stocks. this way you can limit the amount you lose on any one trade. It is up to you and your plan where exactly where you place your stop but don't risk more than 10% of your account on any 1 trade so if you are filled at 0.01 your stop will be 0.009. If you are only using 50% of your account on a trade you can place the stop at 0.008.
4) Overconfidence
One of the biggest destroyers of traders capital is overconfidence. Traders will have a few winning trades in a row then think they have worked out the markets and forget about their plan discipline and trade blindly. We must use strict discipline, not get greedy and look at the long-term benefits of following our rules.
5) Not booking in profits
We must also be ready to take profits when they present themselves. We don't want to cut our profits short but penny stocks can turn at anytime so we don't want to get to GREEDY. There are many different ways to accomplish this, here are a few.
- Set a trailing stop that moves higher as your stock gains in price.
- Taking partial profits at various prices
- Having a certain price target where you will exit the position.
Paradigm Capital Management suggests you to consider following points before trading penny stock:
