Though risky, penny stocks offer some of the most explosive opportunities for making money in the stock market. Penny stocks is any company's stock trading below $5 per share. Here are a few steps to keep in mind when venturing out into the world of penny stocks trading.
Have specific guidelines for entering a trade. Know what is going to cause you to enter a trade. Is it a specific technical analysis indicator or a fundamental evaluation of the company. Whatever it is, stick to it. Don't enter a trade for other reasons, especially not because a buddy told you about some company. If it doesn't meet your criteria, stay away from it.
Know when to exit your trade. What is going to cause you to close your trade? If you have profit, when will you take it? At what point will you take your loss? Don't allow losses to pile up by chasing a stock and adding to your position. This is a loser's game. Exit the stock and re-enter it only when your system give you a buy signal.
Trade penny stocks with good volume. Do not trade low-volume stocks. It is too difficult to get in and out of a position if the stock only trades 20,000 shares per day.
Diversify. Don't put all of your money in the same basket. If you do, you are inviting tragedy. Depending on the size of your portfolio, never put more than 10 percent to 20 percent of your money in any one company.
Use stop orders. If you are not around to execute a trade during market hours, make sure that you have a standing stop order in place for your stock positions. Don't let a market downturn or bad news drain your account.
Be disciplined. This is the most crucial step in achieving success in penny stocks trading. It doesn't matter how good your system is if you are not disciplined to follow it. If you system says take a 10 percent loss, then take it. Don't let it grow into a 50 percent loss. If your system say only take profit on a specific trigger, then don't exit early with a 10 percent profit only to watch the stock double in the next couple of days.