Trading Rules

Here are a few good ideas to keep in mind when trading penny stocks. As you learn and use them you will begin to limit your losses and increase your profits.

The number one rule is to remember that the penny stock market is like the Wild Wild West.​

Most penny stocks will not be around two years from now in the same form they are now. Most will have gone through a name change, reverse split, and have new management with the next greatest business idea that they are going to carry out. Because of this I am never a long term player in these stocks. I am in most trades for hours to weeks.

This is key!!! You must understand this. When it comes to penny stocks there is ABSOLUTELY ZERO connection between a stocks price and the quality of the company. ZERO.

This means that companies with little chance of long term success make massive price gains all the time and that’s all you should care about. 

You don’t get extra credit or more money if the company ‘is a great company’. Most are not. If you buy a stock at .02 and sell at .04 days later and they go out of business a week later who cares. You made money. 

PLEASE ONLY MAKE SMALL INVESTMENTS IN THESE STOCKS. NO MATTER HOW GOOD A STOCK SOUNDS YOU NEVER EVER BET THE RANCH. PENNY STOCKS SHOULD ONLY BE A SMALL PART OF YOUR PORTFOLIO. THESE STOCKS ARE RISKY. PLEASE DO YOUR OWN RESEARCH. THESE STOCKS ARE NOT SUITABLE FOR EVERYONE. DO NOT INVEST MONEY YOU CAN NOT AFFORD TO LOSE.

Having said that, I love this market. Nowhere else can you find stocks that move so much as quickly as you can in this market. It is those moves that give us a chance to earn big profits.

Follow these rules and strategies and you will learn how to book consistent profits.

GETTING IN

Always use limit orders when getting into a stock. Pick an entry price and stick with it.

Don’t chase stocks. There will always be another trade right around the corner. Don’t beat yourself up if you miss one. The last thing you want to do is over pay because you see a stock moving and think you are missing the boat.

Never use market orders to enter into a trade. Using market orders allows the market maker to fill you at whatever price they like and leaves you vulnerable to getting poor fills.

IF A STOCK GAPS WAY UP DO NOT CHASE IT. Most stocks that gap up will come down during the day. (usually starting between 9:45 EST and 10:15 EST) When a stock gaps up the market makers will usually push it lower starting at this time to try to get investors to panic and sell shares back to them so they can make a profit on any shares they are short from filling orders on the gap. If you like the stock and it gaps up you can usually pick up cheaper shares when the market settles back.

WATCH THE OPEN

Watching the open is very important. You can learn a lot about how a stock may act in the first 10-15 minutes after the market opens.

The first thing I look for is lots of selling. If you are watching a stock that has an average daily volume of 50,000 shares and the stock trades 250,000 shares in the first ten minutes and it isn’t moving this is not a good sign. This means there are lots of sellers and they are probably only going to get more aggressive as the day goes on.

You want to see a stock tick up on a regular basis as you see buys come in. If you are in a stock and you see lots of buying and it’s not moving GET OUT. Don’t wait.

KEEP YOUR LOSSES SMALL

THE SAFEST WAY TO DO THIS IS TO SELL A STOCK IF IT GOES BELOW THE PRICE IN MY ALERT.

When you enter a trade you need to determine how much you are willing to risk. Have a firm number and get out if the trade goes against you.

Every big loss started as a small loss where the investor lost control of their emotions and didn’t close out the trade. When you’re an investor you are going to have trades that go against you. It happens to everyone. Successful traders know how to limit losses while unsuccessful ones do not. They begin to hope and pray that the stock will turn around so they don’t lose money and next thing they know a small 10% loss is now a 40% loss. At this point they begin to think the stock cannot go any lower and they hang on.

Now it’s a 90% loss and they finally sell. Do not let this be you. Put a line in the sand in every trade you do. When it gets over that line, get out.

There is an order called a Stop Loss Order. These orders are put below the current market and are triggered when a stock is on the way down. A stop loss order is designed to limit your loss or protect your profits on a trade.

NO ONE SHOULD TRADE PENNY STOCKS WITHOUT STOP ORDERS.

THE BEST PLACE TO PUT YOUR STOPS IS JUST BELOW THE PREVIOUS DAYS CLOSE. THIS IS ALSO THE PRICE I MENTION IN MY ALERTS. STOPS SHOULD BE KEPT TIGHT TO LIMIT LOSSES. 10%-20% MAX.

I SHOULD NEVER HAVE TO HEAR FROM A READER THAT TOOK A BIG LOSS IF YOU FOLLOW THIS RULE. THIS IS THE SINGLE MOST IMPORTANT KEY TO SUCCESS IN TRADING.

IF YOU DON’T USE A BROKER THAT ALLOWS STOP LOSS ORDERS, GET ONE.

SELL ON THE WAY UP

When entering a new trade determine beforehand where you want to get out when the stock goes up. It helps to put in a sell limit order in at the same time you buy the stock. Then when the stock hits this price you are taken out and don’t have to struggle with wondering if it’s going to keep going higher. Book your profits.

BE CONSISTENT

Get used to booking profits no matter how small. It may help to learn to take small profits when you begin. There is nothing wrong with taking 10%, 15%, or 20% profits on trades. This gets you in a winning state of mind and makes taking profits much more of a habit. You do not need to buy at every low and sell at every high in order to make a lot of money in the market. You just need to be consistent.

Everyone wants to hit home runs when they buy penny stocks but the fact is most investors will lose more money hanging on for the big winner instead of taking consistent profits. DO NOT BE GREEDY. This will be the death of your trading account.

TRAILING STOPS

You should always use trailing stops to protect your profits after a stock has gone higher. For example if you get into a stock at .10 cents and it runs up to .20 cents you want to protect your profits. Some people will decide to get out completely and that’s smart but some of you may want to stay in the trade to see if it goes higher. The best way to do this is to use a trailing stop. In my example your stop may be .18 cents which means if the stock comes down off .20 cents and gets to .18 cents your stock is sold. This protects your profits. A mistake that many traders make is allowing a profitable trade to turn into a break even or losing trade. Don’t let this happen to you. Use trailing stops. If the stock continues to move up you move your trailing stop up with it to continue to protect profits as you go.

Always book profits no matter how small.
Put the money in the bank

Follow these rules and you will become a much better trader.

Mark McKelvie
Editor
WallStreet Grapevine