Necesary Steps for Success in Penny Stock Investing

Penny stock investing has the potential to be quite lucrative for the individuals for are able to master the hectic world of penny stock trading.  The reason that penny stock investments have the ability to make so much money is that they are low priced and they are volatile.  It is not uncommon to have a $2 stock swing 20 cents in one day.  Now in a $50 stock you wouldn't think twice about a 20 cent move but in a $2 stock in represents a 10% move.  These moves occur with great regularity and as a result in can be easily seen why investing in penny stocks can be so intriguing.

However, penny stock trading is not as easy as throwing a dart at a list of penny stocks and buying that stock and making money.  If you are going to find success in penny stock investing then you need to have a highly developed trading program in place.  Successful traders follow very specific trading rules.  If you do not set in place such rules you can expect to lose money.  Since we are trading penny stocks to make money lets address some of the necessary components of a penny stock trading program. 

There are a few things that I would look at to narrow down a list of potential stocks to trade.  The first thing that I would look at is the volume of the penny stock.  Do not trade stocks with low volume.  I would stick with stocks that trade in excess of 500,000 shares per day.  Low volume stocks can make it difficult to get in and out of a position without moving the stock price against you. 

The second thing that I would look at is the price of the stock itself.  Penny stocks are generally regarded as stocks trading at $5 or less.  However, I would primarily stick with stocks that trade north of $1 per share. The lower you go the more you risk the possibility of bankruptcy or some other bad news. 

A third thing that I would watch out for is earnings season. I would not invest in a penny stock near it earnings release.  It might possibly take a turn for the worse.   Since penny stocks don't have great fundamentals, I am not willing to take a chance on the stock reporting a good quarter.  Wait until the news is in before staking a position.

The first thing you need to do in order to be successful in penny stock investing is to remove emotions and hunches from your trading.  Hunches will cost you money.  Emotions, if they are allowed to go unchecked, can do great damage to your account. 

You will be most successful when you become somewhat robotic in your trading decisions.  You need to have a set of entry parameters that will tell you when to enter a trade.  I would recommend that your entry triggers be based on technical analysis and not whether you think a company has good prospects.  Penny stocks are not like most stocks that you are used to investing in.  Their fundamentals are terrible so therefore it is difficult to get a feel for their business prospects.  As a result, it is difficult to base your decision to enter a trade on fundamental analysis. 

Know why you are going to enter a trade.  Did the stock cross a moving average?  Was there a divergence in an indicator that you follow?  Spend time figuring out your entry strategy.

When you enter a building you are supposed to find out where the exits are in case of a fire.  Penny stock trading is no different.  Before you enter the trade you need to know why you are going to get out of the trade.  Do not make this decision after you enter your position.  I can not stipulate this enough.  Do not make an exit decision on the fly.  If you are looking for a certain percentage then exit when you get it.  If you are only allowing yourself to lose a certain amount of money then don't let it go beyond that.  If you are going to get out when a certain indicator has triggered then get out. 

You need to be very specific in this portion of your trading strategy. Sit down and take as long as you need to in order to hammer these out. 

I would also to recommend having a penny stock list that you trade.  Find 20 stocks that you have an interest in and watch them like a hawk.  It becomes very difficult to search through hundreds of stocks each and every day for trading opportunities.  It is simpler to watch only a few.  Make sure they are in different industries to give you a little diversification.  When you are trading a narrow list of stocks it gives you the opportunity to get to them in detail.  You are also aware of when their earnings are and you get used to the trading patterns that they go through.