Yesterday, I talked to you about what not to do with penny stocks…
Do not hold them overnight.
Check out my blog post in case you missed it.
It’s one of the most basic rules of penny stock trading.
Now, on a more positive note, I want to discuss what you should do when trading pennies.
Penny Stock; Corporate Finance Institute
I love trading them, and so will you once you learn how to do it.
And they’re great for new traders with small accounts because their insane price action can deliver huge intraday gains that build up over time.
You simply won’t see this kind of risk/reward proposition in higher-priced stocks or long-term plays.
So today, I’m going to show you how to play the penny stock game smart and how to manage your risk so you can reap those potentially big rewards.
Table of Contents
Penny Stocks Are For Trading Only
Let’s be clear right out of the gate: when it comes to penny stocks, we’re talking about trading, not investing.
One of the biggest mistakes I see people make is getting emotionally attached to low-priced stocks.
These stocks are a short-term fling, not a long-term commitment.
Why? Because they’re incredibly volatile.
And that’s exactly why we trade them. That volatility can bring massive returns.
But that same volatility can destroy your account if you don’t know how to trade them.
What Are Penny Stocks Exactly?
A lot of people hear “penny stocks” and think of stocks trading for a literal penny—or maybe a couple of cents.
But in trading parlance, any stock under $5 per share qualifies as a penny stock.
They’re small, they’re cheap, and what they may lack in price, they make up for in profit-making volatility.
You can see massive spikes in just hours…
Notice, I said hours, not days.
By the end of the day, you should have been in and out of the trade.
Penny stocks are incredibly risky for long-term investments. Almost all of them eventually fail…
The reality is that 99% of them eventually return to $1 or even lower.
But if you approach them with the right mindset, you still have a fantastic opportunity on your hands.
Penny stock trading is like sprinting, not running a marathon. You don’t believe in them for the long term. You’re only using them for their quick gains from short-term moves.
Getting Started
First, you need the right tools. A solid brokerage account is key.
When it comes to penny stocks, you need to dig into the company’s recent news, technicals, charts…everything.
That’s why you need a trading platform that gives you a real edge.
I’m talking about one that offers real-time data, charting, technical indicators, paper trading, and more.
My top pick, and the one I use every day, is StocksToTrade.
It features everything mentioned above…PLUS, right now, you can get two weeks of both the STT platform and our Breaking News Chat service for $17.
Grab your 14-day StocksToTrade + Breaking News Chat trial today for only $17!
Know How to Manage Your Risk
You must have a clear trade plan before you enter any trade.
At a minimum, that plan should include your goals, your risk tolerance, your stop loss level, and your exit strategy.
Read more about creating a trading plan right here.
Risk management is non-negotiable.
These are unpredictable stocks, so you need to limit your exposure. Use stop-loss orders to protect yourself, and only trade with money you can afford to lose.
This should be money for speculative trading only, not for paying bills or buying groceries.
With proper risk management, you can survive even when a trade goes against you.
And finally, keep your emotions in check.
I know how exciting penny stock trading can be, but emotions trading is a no-no.
Don’t let fear or greed lead to bad decisions.
My Final Thoughts…
So, why trade penny stocks?
Because they offer fast price action that you just can’t get in higher-priced stocks.
I wouldn’t trade pennies if I didn’t know firsthand how rewarding it can be.
Penny stock trading is an exciting, fast-paced game but it’s not for everyone.
Be sure you’ve prepared well in advance: Make your plan, paper trade your strategy before risking real capital, and have your approach down pat.
With discipline, education, the right mindset, and great tools like StocksToTrade, you’ll be well on your way to mastering the art of penny stock trading.
And if you’re looking for more trading mentorship and training, as well as stock ideas, subscribe to my StocksToTrade Advisory service.
Every STT Advisory member gets a monthly newsletter with a list of my top picks, three weekly videos with my watchlists, bonus reports, and more.
Sign up for StocksToTrade Advisory right here!
Have a great weekend, everyone. See you back here on Monday.
Tim Bohen
Lead Trainer, StocksToTrade