Penny Stocks Commandments

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Video Transcription:

Hello traders, welcome to the stock trading course and the eighth module: penny stock trading.

In this lesson we’re going to talk about the penny stock commandments. And the penny stock commandments are the rules we need to follow in order to be successful trading penny stocks. Because penny stocks trade very differently from normal stocks, and other financial assets, we are going to have to have a lot of discipline when trading them. And before we start with actual trading and strategy we need to talk about the rules we are going to follow. And I’m not talking about entry and exit rules or trade management rules. I’m talking about discipline rules we need to follow in order to be profitable trading penny stocks.

The first rule: ignore penny stock success stories. Trading penny stocks is difficult and can be seriously psychologically devastating if you put unreal expectations in your head. So what you need to do is go through this module, learn what we have to teach you, and start trading by yourself. Contemplate your own results and move from there.

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Second rule: disregard newsletters. Free penny stock newsletters that promote the next Google or the next Amazon are not giving away their hard research for free. They are being paid to promote these stocks. That’s right. Daily free penny stock newsletters are paid to promote and pump these stocks.

Sell quickly. Penny stocks are not investment vehicles and even though they can generate 40, 50 or even 100% in a few days, they can erase those gains quicker than they were made. So what we are going to learn here is once we get into a position, we are going to sell it quickly.

Be cautious with listening to company management. Remember that company management has one interest: get exposure to get their stock up and raise money so they can stay in business.

Another rule: be extremely careful when short selling. And you’re going to see that one of the strategies that we are going to learn is going to be how to short sell a pumped stock. But you need to be extremely careful when you’re doing this. Even though we focus majorly on buying penny stocks, pumped up penny stocks can seem attractive to short sell. If you are not used to trading highly volatile environments, just don’t do it. Because penny stocks are so volatile you can get trapped on a short squeeze and easily be down 25% on one trade.

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The next rule is focus on high volume. We are going to always look for stocks that trade an average of at least 150,000 shares per day. Low volume stocks can be messy and it could be very difficult for you to get out of your position because of the liquidity of the stock. We are going to use mental stops instead of hard stops when we are trading penny stocks. Because these stocks are very volatile and the bid ask spread can be as high as 10%, hard stops will lose you money in the long run. This means that because these stocks are so volatile, that is going to happen more than often that your stops are going to get triggered and then price is going to move in your favor. So we are going to use mental stops. And you can use mental stops on a risk to reward basis or base earned levels. We are going to use both of them and you are going to learn how to calculate them in further lessons.

Looking for the good ones. We are going to always look for the good penny stocks. And what are the good penny stocks? Well, the penny stocks that have rising earnings and are breaking out of natural volume. We don’t want to be buying into a newsletter hype that is going to not only raise our gains, but put us in the hole for a lot more.

And the last rule: don’t trade large positions. Even though it’s appealing to be able to trade large positions with penny stocks you should never trade more than 20% of the average daily volume. And 20% is quite large, you should stick to 15% actually.

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