Ten Commandments of Penny Stocks – Part Two
Penny stocks & the “10 commandments” are not set in stone but they can be good rules of thumb to live & trade by when deciding to buy penny stocks. As a follow up to our first series of the Ten Commandments of Penny Stock Trading, here are 5 more to know:
6. Be Like Kenny Rogers- Know When To Hold ‘Em…& When To Fold ‘Em
If you’ve gone through the entire diligence process and you decide to purchase shares of a penny stock, now is the time to remember your first 5 commandments. If a stock climbs very high, know when to take profit. Likewise for a penny stock that is rapidly declining, consider cutting losses early. Even if it does go back up or gets back to break even, your time value of money should be considered. A small loss now in order to put that capital into a big winner could easily be off-set by holding onto a “turd” for days or even weeks, just to breakeven.
7. Put Mental Stops In Place
There’s no question that penny stocks are very volatile and in line with this, you need to be aware of where you feel comfortable “losing” or where you feel comfortable starting to take profit. Over the counter stocks generally do not allow you to place “stop orders” so a mental stop will entail you monitoring your investment’s price movement closely. Some online brokerage accounts allow their users to set up alerts at the very least. This doesn’t mean it’s a stop order but an alert is like your morning alarm, once the penny stock hits a certain price, an alarm will sound that will bring attention to the price limit getting hit.
8. You’re Not A Prophet, Learn The Market
Don’t try to play god and pretend like you can magically control the markets. Learn exactly HOW these markets move so that you can anticipate moves instead of guess the moves. There’s a difference. No one can accurately time the market perfectly but if you want to maximize your profits, get a full understanding of the penny stock in question and try and plan a viable entry instead of simply guessing. Your odds of making a good trade could be better by looking at the market in its entirety versus trying to look into a crystal ball and think you can hocus pocus your way to a winning penny stock trade.
9. A Damaged Stock, Better Than A Damaged Company
A stock that has drastically dropped could present an opportunity to “play the bottom” on the chart. However a company that has completely fallen apart may not find itself capable of such a rebound. Take for instance the 2008 even where Ford’s share price crumbled to under $1. They did not have the same troubles as many of the other car companies did and actually had sound fundamentals. But due to weakness in the overall sector, Ford was a victim of its surroundings. By early 2011, the share price had recovered by more than 1,400%.
On the opposing end of this conversation, many penny stock companies are liable to fail due to the undercapitalized, emerging growth make-up they have. These fundamentals tend to ultimately lead to a sell-off alone and many fail to recover.
10. Cost Averaging – The Good And The Bad
Cost averaging is a tactic that many traders take advantage of when a stock’s price briefly falls below their original purchase price. Typically a cost average could pay off handsomely, should the price of the stock rebound. Buying lower ends up decreasing the cost basis for a trader’s entire position but in many cases, cost averaging will end up becoming a money pit thus resulting in even larger losses at the end of the day.
This goes back to the emotional side of the coin. If you believe so highly in the company but the company itself is not fundamentally sound, there’s a strong likelihood that all cost averaging will do is get you stuck deeper in a falling knife, or a stock that will simply plummet even further…think about it…if you saw a knife actually falling, would you try to catch it? Similarly, why would you attempt to catch a stock that seemingly has no bottom?