Looking On The Bright Side of Stocks

Six Key Rules of Trading Penny Stocks

Penny stocks, also referred to in some countries as cent stocks, are common shares of small companies trading at low prices a share. There is barely a shortage of these companies, but if you want to be successful, have a penny stock investing plan that starts with observing the most essential penny stock-trading rules.

1. Keep to limit orders.

As explained by their nature, penny stocks are very thinly traded. Therefore, the bid and ask deviation can be quite big. Investors using market orders may be at the mercy of market makers seeking a quick buck. Using limit orders is the best way to avoid this scenario. That means, when you buy or sell penny stocks, your terms – not the market makers’ – will be followed.

2. Keep within regular trading hours.

An absence of volume can lead to after-hour trades that are illogical and most definitely do not represent a good match of buyer and seller. With penny stocks, even a few pennies can make so much difference. Sticking to regular trading hours allows you to elicit the most efficient trade.

3. Never chase Performance.

For some reason, investors can decide to buy only if a stock goes higher. When a stock flies, these investors believe the environment is safe for them. They may be wrong. Usually, by the time they think they’re safe, the opportunity has left and the losses arrive. Sticking to new recommendations and the buy limits they come with, is safe.

4. Limit your holdings to 20-30 positions.

This is a golden tip. Maximum gains could be achieved with 20-30 positions. Returns will be diluted if you get more than that. Lower than that means a performance that lags significantly. Worse, if you get too few stocks, you get the risk of huge losses.

5. Trade with a reason.

It’s fine to own a stock that already has already moved up in value provided you have a good reason for doing so. These reasons can be referred to as “triggers. There’s no taking off for a stock without a trigger.

6. Expect a holding period of 90 days at average.

Lastly, penny stocks can be very volatile, going up or down quite fast. Large gains may be expected up to a 90-day maximum. If that does not take place, get on with the next opportunity in line. Because of the volatility, a stock may have yo going back and forth sometimes. Don’t expect rapid-fire day trading, but if you believe a stock’s value is going down and vice-versa, don’t think twice about selling it.

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