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Your Penny Stock Must-Haves: Part 2

Everyone wants to add to their portfolio and make those BIG splash plays that come with taking chances. But when it comes to trading, as with most things in life, it’s important to understand when you might be taking an unnecessary risk.

Some traders are so focused on gains, they begin to lose touch with factors that might be causing them to actually lose money.

Yesterday, we discussed my first six stock trading rules that all investors should follow. In this issue, we will continue the countdown with #11 to #7.

17 Rules for Penny Stock Trading – #11 to #7

#11 Never Risk More Than You Can Lose

You want to hear one of the dumbest things any wannabe trader could ever do?

Here it goes …

One of the dumbest things anyone can do is to trade with their rent money, mortgage payment, food money, or any other cash they need to live. I’ve heard of people doing it — not a good idea.

But it’s not just the basics. Don’t ‘borrow’ money from another part of your life for trading. Never risk more than you can lose. Period.

Also, don’t use leverage to trade. I never trade a leveraged account. The closest I come is when I short stocks and that’s different. I’ll get to that in trading rule #6.

#10 Track Everything

Remember, it’s said that somewhere around 90% of traders fail. It’s because of a lack of preparation and a lack of being meticulous.

My star student, Tim Grittani, tracks every trade he uses with spreadsheets. All of my top students do this. They track everything and follow trading rules — they are meticulous.

Why track everything?

It’s how you learn and how you measure. How else will you know what percentage of your trades are successful? Which setup is your best, most successful setup? What about your worst?

What would happen if you dropped your least successful setup and focused on your most successful setup?

I hope this makes sense. Track everything. Keep a trading journal and also keep a spreadsheet with information on every trade. Over time this will become one of your most valuable resources.

#9 Pay Attention to Volume

If there’s not enough trading volume you can get stuck in a trade. There has to be enough action for the stock to stay liquid. If you have a position of 10,000 shares but you can’t sell it, you’re stuck.

Simple, right? So for me, anything under 50,000 shares is too illiquid. Even that’s low.

Ideally, I look for stocks trading one million, or even two to three million shares on the day. That way, if I have a position of 10,000 shares, I’m a small fraction of the market.

You don’t want to be more than 1% of the volume being traded that day. If you’re more than that, and things go the wrong way, you can get heavy slippage trying to exit your position.

#8 Don’t Put Too Much Stock in Promoters

Puffed-up press releases can promise massive gains … but if it sounds too good to be true, it probably is.

Promoters get paid to promote stocks. It’s their job. Your job as a trader is to study, prepare, build your knowledge, then become a self-sufficient trader. Part of your job is to understand the role of stock promoters. They aren’t your friends.

Does this mean you should never pay attention to their promotions? As much as I’d like to say you should completely ignore them, they’re a part of the penny stock landscape. You need to know what they do, how they do it, and how it affects price action.

Then, and only then, can you use the information to your advantage.

When you read something like this:

“Using a proven system which has led to gains of 2,987% in his personal portfolio, investment wonder kid [insert name of scam-artist stock guru] is sharing the 3 best stocks you MUST own for the biggest profit opportunities.”

Know this:

The likelihood of any of those stocks making those kinds of returns is probably lower than winning the lottery. You might as well toss your cash in the toilet. It’s BS!

But what if you were to make a play on the inevitable fall when the pumped-up stock comes crashing back to earth? See what I mean? If you know what they do, how they do it, and what happens when a stock gets pumped — that’s valuable information.

#7 Get Out of Trades When They Don’t Go Your Way

Don’t hang out in a trade when it doesn’t go your way. Get the hell out! This trading rule goes along with #3 and #1 coming up.

This one can be difficult. Sometimes you’re early in a trade. Your trading thesis is right, but you already closed your position because it went the wrong way first. The problem is that then you second guess yourself. Don’t do that!

I can’t tell you how many trades I’ve made where if I’d just held on a little longer the trade would be a good one. But you know what? There are more — a lot more — where if I hadn’t cut losses quickly I would’ve gotten smacked in the face, wiped out, decimated …

It’s part of your risk management. This trading rule protects you. You can save more in avoiding losses than what you’d gain by staying in a trade gone wrong. This one takes self-discipline. Don’t overlook it. There will always be another trade.

The Bottom Line

As with yesterday’s issue, I really recommend saving this list somewhere that can be easily referenced. I would go as far as to say any serious trader who wants to WIN would commit these to memory.

Following these simple guidelines can take even novice traders and turn them into success stories.

In my third and final installment of 17 Rules for Penny Stock Trading, we will discuss how to get out of your own way when trading and what you should do things just don’t go you way.

Regards,

— Tim Sykes
Editor, Penny Stock Millionaires

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Timothy Sykes

Tim Sykes is the editor of Tim Sykes’ Weekly Fortunes, a bi-weekly penny stock trader.

He also writes the free daily e-letter, Tim Sykes’ Penny Stock Millionaires

Tim’s most famous for turning the $12,415 dollars he received at his Bar Mitzvah into more than $1.65 million dollars in trading profits by college graduation.

In 2003,...

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