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Penny stocks offer a unique opportunity to investors who know what they’re doing. In this post, we offer special guidance to investors interested in day trading penny stocks.
Why Do Investors Choose to Day Trade Penny Stocks?
If you’ve never heard of it, or you have but don’t know what it is exactly, a penny stock is a company share that is valued below $5. Because of that, it doesn’t qualify to be traded on an exchange. Instead, it is traded over the counter.
Many investors around the world have chosen to day trade this type of stock. In fact, some of them exclusively trade this way because day trading penny stocks provides such unique opportunities. However, understanding some basic rules is vital to start your day trading journey with penny stocks.
The following are five simple but foundational rules:
1. Believe in the Opportunity Not the Company
The general belief about buying equity in a company is that you, as an investor, have to study and buy into the potential of long term growth it possesses. Indeed, buying stock is about being a part-owner and expecting to profit from long term growth.
For example, those who bought the Amazon (AMZN) stock in early 1997 at $18 hoped it would grow in value over time. Indeed, in 2020 the Amazon shares are trading at over $3000. Investors who’ve kept their holding this far must be pleased about it.
However, there is the other side of the story. Many more investors in the late 1990’s believed in the potential of the many startups that went under with the bursting of the dotcom bubble. The stock of the majority of these companies never traded over $5.
Indeed, most of the companies that have their stocks traded under the penny stock category never grow to be anything.
It is for this reason that many proponents of trading penny stocks such as Timothy Sykes advise that all that should interest you is how a share is performing today and not the long term performance of the company behind it.
RELATED ARTICLE: EVERYTHING YOU NEED TO KNOW ABOUT TIMOTHY SYKES
2. Day Trade Penny Stocks Based on Information Not Emotions
You’ll achieve more success in day trading of penny stocks by carefully studying market trends. More importantly, you’ll need to get good at identifying critical narratives around changing events as quickly as they happen.
For example, if a tech startup files a partnership with a major industry player, reading the document on the regulator’s website before the press release is published can give you an edge.
In other words, you should, in particular, buy a stock because of a piece of information that gives you confidence that the stock is about to grow in value. It should never be because of how you feel about the product the company is working to release to the market or the social change it promises to bring about.
Indeed, one of the advantages of trading penny stocks is the high informational inefficiencies that exist there. You can exploit this by being on penny stock trading online forums and using paid services that aggregate happening events.
In comparison, the companies with stocks traded on an exchange are a lot more careful with their communication and messaging. For example, their filing with the US Securities and Exchange Commission (SEC) will be at or near the same time as the press release that announces it.
3. Exit the Moment You Hit Your Target
When you hit your target, exit. Don’t be greedy when you’re trading penny stocks.
Whenever you identify an opportunity and ascertain the likelihood of the price of a particular penny stock going up, you should also set a clear and realistic goal. In other words, know how much profit you want to realize. Once you hit that mark, exit even if you feel like the price might keep going further up.
For example, if you are looking at a 20% profit margin, exit the moment you’ve hit that mark. If you need to, go back to the drawing board and analyze the market and the penny stock afresh. Then you can make new decisions on whether to go in again using further information.
If you don’t keep this discipline, you are likely to lose control, and that means finding yourself in difficult market territories.
4. Don’t Wait for a Turnaround
When you’re day trading penny stocks, cut your losses the moment the stock turns red.
The information you get about a penny stock might not always serve you well. Many times you are going to buy a stock expecting the price to rally up, only for it to take the opposite direction.
When that happens, never stretch your hope too much, expecting that the graph is going to change direction and that you are going to recover and make a profit. In particular, you need to guard against the misguided belief that if you stay put just a little longer things are going to turn around. Sometimes they do, but many times it only gets worse, and you end up losing control—along with your money.
The risk is not worth it. Cut your losses immediately when things start to turn red. It is better to lose just a little of your investment than to lose a lot. Also, you can always try the next opportunity that comes along. Then you are likely to recover what you’ve lost.
5. Hold out for the Right Opportunities
Day trading is not a nine-to-five job so that you have to be doing something at all times. You should never feel compelled to trade even when you can’t see an opportunity. So don’t trade penny stocks just for the sake of trading.
Normalize letting a day go by without your doing anything, especially if there is no viable opportunity for you to act on.
In other words, your trading should be about the opportunities that come along and not just taking action.
Learn All You Can About Day Trading Penny Stocks
While no one can promise or assure you any penny stock trading strategy will earn you a lot of money, using these five rules puts you in a better position to be successful at it. This is, however, a foundation on which to build a working strategy. You should put in a lot of hours to understand how day trading penny stocks works.