The following are the top 10 penny stock rules that you should always follow.
Rule #1 – Never trade with the money that you can’t afford to lose
If you need the money for emergency use, don’t use it to trade. Trading penny stocks is risky especially for stock market beginners. You may lose all the money that you put in. Trading requires patient and if you are relying on this money to buy food or to pay rent, you will most likely get emotional and make the wrong decisions.
Rule #2 – Stop Loss
Always have a stop loss for each penny stock you buy. You should calculate your stop loss before you enter a trade. Trading penny stocks without stop loss is doomed to fail. When you trade without a stop loss, even if you make a 20% profit for each trade on 5 consecutive trades, you may lose it all on a bad trade. So setting a stop loss for your trade is extremely important.
Rule #3 – Limit Order
Always use limit order to buy and sell stocks. Never use market order because most penny stocks are illiquid, and there might be a big difference for the price you see on the screen and the price you end up getting.
Rule #4 – Get out when your trade is not working out
If a trade is not going your way, get out. Some penny stocks won’t move anywhere for a long period time, you don’t want to expose your money to risks with those stocks. Often, a stock chart pattern might look like it is going to make a move any time soon, but its usually your imagination. So get out if the stock is not going up, you don’t want to tie up your money for these penny stocks.
Rule #5 – Trade only penny stocks with high volume
Most penny stocks have low trading volume and you will often have to pay more when buying a stock or sell it at a discount when you try to sell a stock. It is because there aren’t that many buyers and sellers and you will have to pay more fore slippage costs. So only buy penny stocks with high volume.
Rule #6 – Don’t Overtrade
When you can’t find the right trade setups, don’t trade. This is a mistake that many stock market beginners make and I learn it the hard way. I used to trade all the time because I want to keep myself busy and sometimes I would trade stocks that don’t fully meet my trading requirement. I ended up losing money on these trades and the losses added up quickly. Not only did those bad trades washed away my profit, they also hurt my confidence in trading. I had to stop trading for a few weeks and analyzing what went wrong. I learn that when I made good trades consecutively, and my stocks were up 20%, 30% and 50%, I let my ego get in the way. I felt like any stock that I touch would go up, and I started to overtrade which turned out to be a disaster. Eventually, I learn the to correct my mistake and now I’m much more patient. If I can’t find a stock that meet my criteria, I won’t buy even if that means I had to wait a week or two or even longer.
Rule #7 – Don’t fall in love with any stock
Always remember you are trading penny stocks, not investing. Trading means you buy and sell a stock in a short period of time usually within a few days to a few weeks, whereas investing means you buy and hold a stock for a year or two or even longer. So if your stock is falling and hit your stop loss, sell it. Don’t try to double down or do anything crazy. I see many traders double down, and even triple down on a losing trade and eventually lose everything on a single trade. Its not worth it, take your loss and move on.
Rule #8 – Record your trades & learn from your mistakes
You should have a trade journey that lists all your trades, for both winning and losing trades. You should study them and learn from them especially the losing trades. Try to find a pattern and avoid the losing trades and learn from your mistakes.
Rule #9 – Don’t rely on trading tips
You should always trade based on your strategies and rules. Never trade penny stocks based on tips from penny stock gurus or your friends. You can use the tips and do further research yourself, and see if the stock meets your trading criteria, just don’t buy or sell the stock purely based on their tips.
Rule #10 – Follow your own rules closely
You should always follow your own rules when it comes to penny stock trading. When you enter a trade, you should have a stop loss and a target price in mind. If the stock price hit your target or your stop loss, you should sell it. Never let your ego get in the way, and think this time is going to be different. Trading penny stocks and making money for the long term is all about discipline. If you let yourself break your own rule once, chances are you are going to break your rules again in the future, and eventually you may lose all your money because of one or more bad trades.
To learn more about penny stock trading, read penny stock strategies.