The Joys of Trading Penny Stocks

Have a Plan, Don’t be a Pig!
And by pig, I mean… don’t be greedy. Many times, we are caught in the excitement of a trade and let our emotions take over.  We’ll just let it ride a little longer hoping that the penny stock will hit that $1 mark. After all, it’s almost there!

Emotions Rule
We may have intended to sell by the end of the day because the stock was on an upswing, but by mid-day it was continuing to climb.  Then, the market is closed.  You know that wasn’t the agreement you made with yourself when you purchased, and now you are obsessed with what will happen at tomorrow’s bell.  You read all the news alerts, look around on the Internet for any insight that you may have missed, and read the company profile.  You are anxious and toss and turn all night.  You are excited that you are sitting on a gain, but you are afraid it will crash. Holding onto the penny stock causes insomnia and then the next day, you are in a brain fog causing your emotions to heighten and you to make irrational trading decisions. You pushed it just a little too far. Sure enough, the next day it dropped and you can’t get out fast enough.  If you had just sold before the close as originally planned, you would be at a higher gain.  It was an emotional risk that in my book is just too risky.  These emotional swings can have detrimental impacts on your trading strategies and portfolio.

Nitty Gritty of Greed
Greed doesn’t have a ceiling and is never satisfied.  There are so many stories of investors holding on to 500% or more gains only to find it crash before they could get out.

Now taking a closer look at this situation, if asked the investor prior to the trade what % gain he/she would hope to get, it would be a lot lower than the 500% he/she was holding onto.

Setting a Plan
We’ve all been there, but now’s the time to take a step back, create a plan and make smart choices. Often times, when we let our emotions rule, the strategy is eliminated and even a little greed more often results in a loss or lower gain that originally planned. Your odds of profiting are far greater, when your emotions are in check and you follow your plan.  You are less likely to make impulse or irrational trading decisions.

When you first buy a stock, create your plan.  What are your realistic goals?  Is your increase 20% or 80%? You need to know and follow these targets at every moment.

If you set a goal of a selling point at 20%, but then the stock is building momentum toward 100%, it’s ok to adjust slightly. Just don’t throw emotion into it where you are holding out for 200% profit. Be deliberate.

Making Adjustments Along the Way
Pay attention to all the market influences on your stock.  Meaning look at news releases, financial statements, trends, promotions and any other market condition that may impact the increase or decrease of your stock price.

If the market is on fire, it’s perfectly ok to reevaluate your target prices. You need to be willing to do this if it is rising or falling. For example, a strong earnings report may be a indicator to you to make an adjustment in your targets.  You decide that you will sell at 30% instead of 20%. You feel confident and educated on the decision and it is still in alignment with your original factors in setting the target.

Set proper expectations, and act on them. The mistake is made when you begin to hope or wish as if you are at the casino. Keep yourself in check.

Keep these in Mind
You may benefit from using stop loss orders when trading volume is high.  This is more challenging with penny stocks because many of them do trade at lower volumes. A stop loss allows you to keep the shares if they continue to climb, but sell at a specific price if it drops. This is great for trading to help you keep within your limits without losing your shirt if the market plunges.

If you will take one thing from this post, just remember that it is way better to sell too soon than too late. If a stock continues to climb, you should remember that profit takers can move in any time to lock in their gains, and if they sell before you do you’ll be looking at lower share prices while they are off counting their profits. Every dollar that a share climbs convinces more and more traders to start taking their profits. You need to be one of the first and not greedy.

It’s normal that once you’ve sold your stock, often times, it will continue to increase. Don’t be upset, don’t be greedy. You already hit your targets.  Enjoy your win!

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