3 Principles of Trading Penny Stocks Safely

Posted by on August 25, 2014 7:51 PM
Categories: Lessons

A lot of traders lose in the penny stock market because they put on added risk just because they are trading penny stocks. Just because you are trading penny stocks, it doesn’t mean you should ignore the 3 principles of trading. These are time tested principles that will put the odds in your favor.

The three principles of trading penny stocks safely are:
1. Diversification
2. Limit exposure to any one stock
3. Scaling

Diversification: Diversify, especially with penny stocks. It is better to buy a bunch of penny stocks than to put all your money into just one penny stock. The reason is that penny stocks can explode hundreds of percentage points higher and so hitting just one hot penny stock will more than make up for the number of losing picks.

Limit exposure to any one stock: Do not keep buying more of a penny stock as it drops. If you do that, you will end up with a huge percentage of your entire trading account in just one penny stock and your exposure to that one penny stock will be too high. Many of the best penny stock traders limit their exposure in any one penny stock to no more than 3% of all the entire amount of money in their trading account.

Scaling: How many times have you bought into a stock only to have a lot of traders already in the stock immediately dump when they see your buy order? In thinly traded penny stocks this is a problem. Scaling allows you to test the psychology of current holders of that stock. If insiders immediately begin selling when your buy order is executed, you may not want to buy any more of that stock. A lot of traders use the 1/3 rule where they scale into a trade with three separate buy orders.