Trading Penny Stocks? 17 Rules You NEED to Follow…
Rules are an important part of life. They help us establish meaningful boundaries.
When it comes to penny stocks, trading rules are everything. Personally, I try to keep things simple. I follow the same trading rules I teach all my students.
In this issue, I’m counting down backwards from #17 to #12. Kinda like Letterman used to do with his Top 10 lists. But I have a few more than him here. So much so that I’ve split this article into 3 parts, because this is very important information. Here we go.
17 Rules for Penny Stock Trading – #17 to #12
#17 Stick to Your Trading Plan
This is a high-level, big-picture, and strategic trading rule. The reason so many people fail at trading is that their preparation sucks. Preparation is key. So how do you prepare?
Aside from studying like crazy…
You make a plan.
Now, I know there are probably people reading this, thinking, “Cool. Make a plan. How do I do that? And what should be in my plan?”
The key, and this is huge, is to stick to your plan.
#16 Always Use a Stop Loss
A stop loss can protect you from losing more than your planned risk capital. In other words, assuming you made a trading plan, you know how much you’re willing to lose on a trade. You have a predetermined exit point.
But I want to clarify something: I don’t use electronic stop losses just like I don’t use market orders. I use mental stop losses as a trading rule.
This is super important, so pay attention. If you’re in a trade and it goes wrong, you want to get out, right? But what if there’s a panic? What if the price falls 50% in 10 minutes? You want out, right?
Think of it like this: Say you set an electronic stop loss as part of the trade. What happens if the stock falls so fast your order isn’t executed when the stop loss is triggered?
Eventually it gets executed — but as a market order. In other words, your order is executed at the market price, which might be nowhere near your trigger.
With a mental stop loss, if the price is dropping fast, you can change your exit price by the smallest amount necessary to close your position. You can allow for some slippage. It seems like you’re losing more that way, but it can save you a wad of cash in a fast-moving trade.
So, use a stop loss — but make sure it’s a mental stop loss. And understand there might be slippage and that’s OK. Stick to your trading plan. A small loss in a fast-moving trade is better than getting decimated because you have a market order in place.
Big caveat: If you can’t be at your laptop during the trade, and it suits your trading strategy, it might be good to set an electronic stop loss. It’s not the way I trade, but there are legitimate reasons for doing it.
It’s all perspective, right?
#15 Keep Trading in Perspective
The best of the best in any field are not perfect. Think about baseball for a second. Even if you hate baseball you might know that a great batter gets a hit about 30% of their at-bats. That means they fail more than two-thirds of the time.
Here’s another example: NBA-legend Michael Jordan’s career field-goal percentage was 49.7%. His career three-point field-goal percentage was 32.7%. We’re talking about arguably the greatest basketball player of all time.
Of course, there’s a lot more to basketball than shooting, and there’s a lot more to baseball than hitting. Just like there’s a lot more to trading than how many trades you win or lose.
The skills I teach my students are skills that can last a lifetime. Keep trading in perspective. Keep your emotions out of it as much as possible. Be prepared for wins and losses. Don’t expect every trade to work perfectly.
Do this instead…
#14 Treat Trading Like a Business
Even if you decide to trade part-time while holding down a full-time job, you need to treat it like a business. If you don’t take it seriously you’re not likely to study up. So treat it like a business in every sense.
What would you do if you decided to start a business on the side? Would you just start throwing money at something and hope for the best? There are plenty of people who do that and fail miserably. There are too many traders who get absolutely decimated doing it.
How do you treat trading like a business? Think of it like this: If you start a business you expect to incur expenses. Plus, most businesses take several years to turn a profit.
Then there are tax liabilities, long hours, stress, uncertainty… and a laundry list of other things to consider.
Trading is a business. Treat it like one. Respect it — which is another way of saying respect yourself and your hard-earned cash enough to approach trading like a professional. Be willing to do what others aren’t prepared to do.
#13 Develop a Trading Methodology Based on Facts
Sometimes I want to scream at the top of my lungs when I see the scam artists and garbage out there.
Don’t look for some unicorn, mystical, magical, genie-in-a-bottle trading method. It doesn’t exist. You don’t have to be a genius to do this. I’m not that good at math, I’m not that smart, and I don’t have some link with the cosmos that helps me trade successfully.
How do I do it, then? I study like mad. I play it safe, and I look at patterns that have happened in the past to see if they’re happening again. I look for facts instead of looking for something that’s not there. I follow this set of trading rules.
Where can you find facts? Do your research. Study the charts. Look at the SEC filings. Read the news about a stock. And please… if you get information from a chat-room or a press release, don’t follow it blindly. Do more research.
I wasn’t gonna mention this, but it’s sorta funny so I’m throwing it out there. I recently read this article suggesting a high percentage of Americans can’t tell the difference between fact and opinion. Funny and totally scary at the same time.
I don’t mean to be derogatory about people. I just want you to get this clear in your mind because the market is unforgiving. It will destroy you if you try to trade based on anything other than facts. Even with facts you’re gonna lose some trades.
#12 Protect Your Trading Capital
It’s impossible to trade a blown-up account. What do I mean? If you lose all your money because you didn’t follow your plan and had no risk management system in place, then you’re out.
Sure, you could save more money and top off your account for another try. But how many times can you do this, from a psychological perspective?
How do you protect your trading capital? Make a plan and stick to it (trading rule #17). Use a mental stop loss (trading rule #16). Pay attention to the next rule, as well.
Heck, this entire list of trading rules can help you protect your trading capital. Print it out and put it up on your wall. Read it every day.
The Bottom Line
These 6 vital penny stock trading rules should always be in your mind as you trade. You want to get to where these rules become second nature.
But this is only scratching the surface…
In tomorrow’s issue, we will take a closer look at some ways you can protect yourself from some of the riskier practices that I’ve seen. From the money with which you trade, to the best way to stay on-top of your portfolio.
— Tim Sykes
Editor, Penny Stock Millionaires