How to Avoid Losing Your Shirt When Trading Penny Stocks
Penny stocks are a great way to earn a passive income and develop a nest egg for the future but they need to be approached with caution.
Too many people have lost their shirt by investing in penny stocks and if you are to avoid becoming one of them then there are some important things to bear in mind.
In this post, we’re looking at the best ways to avoid losing your shirt when trading penny stocks but the lessons also work for other types of investment too.
So read on and find out how you can make sure you don’t end up shirtless!
Don’t invest more than you can afford to lose
Penny shares are volatile. They are a perfect example of the risk/reward equation. The more reward there is then the more risk you will be running.
This means that you can make a fortune by trading penny stocks but by the same token, you can lose all of your money.
Unsurprisingly, research shows that the more experience traders have, the better their portfolio performs so you need to be aware that in the early days you’ll make mistakes.
But mistakes aren’t the end of the world, as long as you have a well-diversified portfolio and you aren’t betting the farm on one trade.
Think of it as another form of education. Every time you make a losing trade you pay for your education but in return you get valuable experience that you will use later.
Do your research
Research, research, research.
This doesn’t mean taking a tip from a friend and then buying thousands of dollars of Over The Counter (OTC) stocks based on little more than hearsay.
It means using credible sources to identify target stocks that meet your criteria and then investigating them until you have a complete picture.
The more information you have about a particular stock then the more likely you are to make money, and more importantly, know when to get out.
One way to build up your experience level is to open a share trading account with a broker that has a dummy trading function. This lets you trade with pretend money until you build up enough experience to go for it for real.
Don’t believe you are smarter than the average bear
Did you know that almost 80% of Americans think that they are above average drivers but that 90% of crashes are down to human error?
Logically two things can’t both be true but the fact is that many people believe they are better than others and even when they make mistakes they fail to recognise them.
If you aren’t to be bitten by hubris then you need to be aware of your shortcomings and take steps to overcome them. This is all part of the emotional journey of becoming a successful penny stocks trader, understanding your weaknesses and then working on them.
People who understand that trading is a job of work like any other and that to be good you need to work at it, tend to make more money from penny stocks over a longer period.
Learn as much as you can
Education is the key if you want to make profits so become a sponge and soak up as much information as you can.
If you don’t even have a grasp of the basics then it is fair to say that you can expect to lose a lot of money very quickly and so leveraging other people’s experience in penny stock trading really can help.
As a starting point read this penny stocks trading guide by Tim Sykes which will give you all the information you need about starting to trade.
Make sure you search out sources of information wherever you can and assess how much weight you can put on it. You may decide that information in the Financial Times or Washington Post is of much more importance than something a friend tells you in a bar!
Diversify your portfolio
Never, ever put all of your eggs in one basket.
The key to a profitable portfolio is a diversified portfolio.
Remember, with trading you are playing an averages game. It’s not about that single massive score that makes you a millionaire, but about developing a sound and logical strategy and then using it to make consistent gains.
If you are able to beat the market more often than not, and you have a well-diversified portfolio then you can’t fail to make money.
Bet all your money in one go on a sure thing and you stand to lose the lot!
Never chase your losses
The mental side of stock trading is one that doesn’t get talked about enough and whilst it is easy to find out plenty of information about the mathematical aspects, the mental and emotional side is just as important.
One good example of this is where traders make a bad call and then make it worse by chasing their losses.
If you are not to lose your shirt then it is vital that you remove emotion from the equation. Don’t worry about mistakes you make ( because you will make them) and don’t think about things that could have been.
Instead set your limits (use stop-losses), sell out when your stock hits the high or low point and don’t look back.
Removing the emotion from trading penny stocks is easier said than done, but the very best traders are able to develop a strategy and then stick rigidly to it, only changing course when the data supports it.
The worst traders buy on a hunch, a tip that’s a ‘sure thing’ , or because they like the sound of the company name!
You can make money with penny stocks
There’s no doubt that people do make money by trading in penny stocks. In fact, the best traders make a lot of cash but by the same token, the worst go bust very quickly indeed.
If you don’t want to fall into the category of people who lost their shirt on penny stocks then follow our tips and enjoy the ride.