Penny stocks can be a great way to make money, but if you want to trade successfully, then there are some really important rules that you need to know about.
These aren’t legal rules, these are the sort of rules that come from hard-won experience and can make a real difference to your success rate.
So if you want to make money consistently, these are the things that you absolutely need to keep in mind.
Do your research
The first rule is that you 100% need to do your research.
Trading penny stocks isn’t a matter of going in big with your hunches. In fact, it is a much more considered process of selecting stock based on your pre-set trading plan.
This means that as a percentage, you’ll spend much more time researching than actually trading.
The more information you are able to bring into your research the better so looking at news services like the Motley Fool Newsletter will help you find possible target stocks.
Once you have a stock in mind then it is worth researching the general sector using resources like the Financial Times site and looking a bit deeper into the specific claims made about the company in question.
For example, if you have a company that claims to have the next big thing in asthma medication, go and check out specific high-quality sources of information such as the NICE site.
The simple rule of thumb is that when you think you have done enough research, do some more.
Remember you will lose money
This is really important because it goes to the whole mentality of a successful trader.
If you are the sort of person who can never lose on a trade then oddly you’ll find that you are increasing your chances of failure.
Successful penny stock traders understand that sometimes, despite all of your best efforts you are going to lose on a trade and you are better to get out quickly than hang on in there and see if you can win your position back.
Losing is all part of the game. What makes you a winner is having a healthy attitude towards it.
Winners can be winners again
Penny stocks traders often have an aversion to buying stocks a second time.
However one of the most successful ways of setting a trading plan is to use patterns.
For example, if you find that a certain stock always has a spike on the 5th day of every month, or every day at 11 am then why wouldn’t you buy again?
In the same way as it is a bad idea to get nostalgic about stocks and buy them because you once ate their food or used their app, it is a mistake to simply discount a good prospect because you bought it once and already made money.
Winners really can be winners again so don’t discount a stock that you have already taken a profit from.
You’re not here for the long term
Traders aren’t investors.
Remember that a trader isn’t buying into the long term success of a business and that goes even more so for a penny stock day trader.
Investors buy into the ethos, aims and ambitions of a company because they think that it will do well over the medium to long-term.
Day traders buy because they see value. They buy, they sell, often in the same day.
It’s not exciting
Forget images of stripey coated traders shouting orders at each other across a crowded trading floor.
That went out with the old century.
Instead, a successful penny stock trader is likely to lead a pretty solitary life and have an unbelievable work ethic.
They’ll spend hours doing their research, setting up their stock scanner and making sure that they have done everything they can to reduce their risk.
They’ll develop a series of trading strategies that they will test over and over again in dummy accounts, refining them until they are sure that they have found a winning formula.
Finally, they will make their trades.
Admittedly, there are a few little buzzes when the trades finally go in and there’s nothing like closing a position with a healthy profit but don’t imagine a high-octane life of shouting ‘buy’ down the phone.
Just get used to the fact that a laptop is your new best friend.
You’ll need to go back to school
If you want to learn how to trade penny stocks then you’ll need to go back to school.
Trading penny stocks isn’t something that you can just have a natural gift for.
Take the example of a football player. We see them once or maybe twice a week plying their trade on the pitch. Making brilliant passes or scoring unbelievable goals.
What we don’t see is the years of work they have put in to get to that position. We don’t see the hours of training each week or the sessions they spend with analysts understanding their next opponents.
We just see the good stuff.
Penny trading is exactly the same. If you want to get good then you need to get educated.
Learn your craft, perfect your trade, become a professional.
Put in the hard yards and you’ll find that you make more successful trades, earn more money and reduce your risk.
Treat trading penny stocks like a profession
The most often quoted stat for penny stocks is that 75% of people lose money.
So what do the other 25% do that is so different?
The truth is that they treat it like a profession rather than a game.
Successful traders understand risk and so they set about forming a strategy that reduces their chances of a failed trade.
Good traders keep learning and know that there is no shortcut to making good money on the markets.
If you follow our tips then you are reducing your risk and taking the first steps towards building a successful career as a penny stocks trader.