Penny Stocks Invest Blog

There are no guarantees in the penny stock market. There are, however, safeguards and prudent trading practices you can employ to minimize your risk in the penny markets and maximize your profits. The following six guidelines will help to keep out of trouble when buying penny stocks.

Ask Yourself Why…

Before buying any penny stock ask yourself why is it going to rise in price. And if your answer is that some anonymous poster on a stock message board said so, you should strongly consider doing more independent research (sometimes referred to as due diligence or DD) on your own. There is an exception to this rule, however. That is, if the penny guru you are following has an impeccable record of picking winners, go with it.

 

Heading South?

Never buy a stock that’s going down. Yes, we’ve always been told to buy stocks on dips. And that’s correct. But the true wisdom is to buy after the stock has established a solid rebound and is heading back up. This is where you’ll want to check your charting.

 

What Time Is It?

Professional traders refer to the first hour of trading as amateur hour. So be extremely careful buying penny stocks during the first hour of trading. The reason is that market makers and professional traders often allow stocks to shoot up during the first hour (hoping to lure in inexperienced traders) only to allow them to slam down shortly after. Until you begin to recognize how a stock trades, you might be better off waiting until you see a solid trend for the day.

 

Cut Your Losses

I’ve seen people lose enormous amounts of capital by not selling losers. But the experienced penny stock investor sets a limit on his or her loss and sells the stock if it isn’t moving north. There is no rule of thumb for cutting losses such as 10% or 15%. Establish what I call your ‘threshold of pain’ (or level of loss) and stick to it.

 

Take Profits

This sounds so simple yet it can be very difficult when buying and selling penny stocks. If you’re able to sit by and watch the positive movement of a stock you might consider recouping most or all of your original investment by selling a portion of your shares and let the rest ride. I think the best strategy for actually making money in penny stocks is this: Don’t get greedy.

 

Control Emotions

The two emotions that drive the penny markets (all markets actually) are fear and greed. The market makers understand this and play it to their own advantage. The best insurance against being a victim of this when buying penny stocks is to do your homework and become familiar with the trading patterns of all of your penny stock investments. Good luck!