Trading Penny Stocks - How to Improve your Ability
The world is full of tradable instruments. They range from currencies, indices, commodities, and equities. Each of these groups is made of thousands of underlying items that one can trade. In equities investing, there are different industries which you can trade in. In addition to industries, equities are grouped in terms of valuations such as the large caps which are the largest companies such as Apple. The penny stocks on the other hand are small companies that are worth hundreds of thousands or a few millions. They are priced at less than $5 a share. While many people have lost their entire investments in penny stocks, there are some who specialize in trading these stocks. In this article, I will highlight a few tricks to help you trading penny stocks.
#1 - Go Short Term
The first trick you need to use is to always go short term when trading penny stocks. In investing, there are people who follow the Warren Buffet model of buying to hold. This is not a bad strategy especially when the companies you are dealing with are big ones such as Google. See, with a company such as Google, you can use different models to value the company. In addition, there is a lot of information about the company. For instance, when the company releases its reports, the analysts who follow it ask many questions that are relevant to an investment thesis. To the contrary, for penny stocks, not much is known about these companies. Some even don’t have a basic website. Therefore, you should always open a trade with the aim of selling after a short while.
#2 - Buy More Traded Firms
I read a story about a trader in penny stocks recently. This trader saw an ‘opportunity’ to trade in a company. Every time he went to the dealer, the price was up. He went to the dealer on a daily basis and added his investment. Within a fortnight, the price had gone up by more than 300%. He was happy about his investment. Then, one day, he decided to sell his position and there was nobody to sell to because all along, he was the only buyer. If you are trading penny stocks, try as much as possible to trade companies that have high trading volumes. This will help you avoid being in a similar position as that explained above.
#3 - News Can be Deceiving
For penny stocks, news can be deceiving. When trading large-cap stocks, using the news is very important. This is because the news show the direction of the company. For penny stocks, I recommend that you take every news with a pinch of salt. Another story. A few months ago, a trader heard some bad news about a small pharmaceutical company and decided to short it. He didn’t put a stop loss. Then, he went to a meeting. After the meeting, he went to his trading terminal to find the shock of his life. The company had skyrocketed and his account was negative 12,000. He was trading on margin. Another trader bought a company whose CEO had issued a twitter post confirming that the company would announce great results. A few days later, they filed for bankruptcy.
#4 - Risk Management
Trading the penny stock market is risky. In a day, a penny stock can move up by more than 500%. This is good if you are long the company. The opposite is also true. In many cases, some companies have lost more than 500%. In a large cap company, this has never happened. Therefore, it is important for you to carefully assess your risk and allocate capital accordingly. You don’t want to be caught in a situation where your account loses more money than you have within minutes.
#5 - Keep a Journal
This is not unique to penny stocks but in all your trading. Some of the best traders in the world uses a trading journal. This journal is a journey. It includes your wins and your losses as well. The journal will help you to remember the companies that you have traded with in the past. It will help you identify the mistakes you have made so that you won’t repeat it.