Common Mistakes Rookies Make When Trading Penny Stocks
Trading Penny Stocks can really take you to the poor house. You have to have a good idea of what you are doing before you start trading penny stocks and you have to come to the table with proper money management. There are several things you should avoid if you decide to trade penny stocks and I want to go over a few of them. Before I do that I want to briefly discuss what a penny stock is. A penny stock is a common stock that trades for less than $5.00. These are most commonly known for trading on the over the counter bulletin and pink sheets, but they are also traded on the NYSE, AMEX and NASDAQ. Penny stocks are often associated with manipulation and scams since the float allows for easy influence of price with very little flow of money. Now that we know what they are lets talk about some of the common pit falls associated with trading these cheap stocks.
1. Believing the hype of a Promoter.
This is one of the biggest mistakes you can make as a penny stock trader. You never want to listen to the hype of a stock promoter because they are paid, and paid well I might add, to tout these stocks. They are basically paid to make the price go up so a 3rd party can unload their shares which in turn makes the price crash. These promoted stocks will get heavy volume but half of the pumps don’t even work. That is not to say it is not okay to trade a pump because I do it all the time, but you have to make sure that you are trading one that is being pumped and everyone is on it. If you take a look at HELI from the week of 8/16. This is a perfect example of when it is okay to trade these. The volume on HELI persisted all day for 2 days straight before dying off. This was a good pump and the momentum was obvious. There were many promoters on this and everyone was all over it. I was in 3 different chat rooms and everyone was in on the pump. I like these kind of plays, but that does not mean I am willing to risk an overnight hold. Part of my trading plan when it comes to pumped stocks is being out the same day I enter. You never know when the pumpers are going to unload their shares causing the price to crash 50% or more…. AND IT DOES HAPPEN. In fact there was a promoted stock that I witnessed drop 80% in the first 20 minutes of the day…. That is crazy!
2. Liquidity
This is another common mistake that rookie traders make when they first begin trading penny stocks. They don’t look at volume to see if the trade is liquid and they get stuck in a stock that has a 10% spread and they can’t get out of it. If you are watching the tape and you don’t see order after order coming in then you won’t be able to exit the trade and take money. Not only that they are starting the position 10% in the hole. This is really important and leads me right into my next point.
3. Investing
Not only is investing in penny stocks a bad idea because of the investment, but also because of the ability to trade. What do I mean by this? Well if you want to make money as an investor you have to buy things that others will buy in the future at a greater price. Usually when these stocks look appealing it is because of false PR that comes out promising everything under the sun if you invest. Well guess what dries up when the spam emails stop going out? You got it… volume, liquidity and PR. So what does this mean? It means that you should only be Trading Penny Stocks. The majority of the time the volume will never return and you will be stuck with a huge loss. This is not to say that you can’t find a penny stock that is a secret diamond in the rough, but it does mean if you ever decide to invest in one of these penny stocks you should do only a minimal amount and be willing to lose it all.
4. Being Greedy
Last but not least is being greedy. This is because penny stocks rise so fast and in your mind you want to think it can keep going forever, but the reality of it is that you must lock in profits… PERIOD! You have to lock in profits and when you are taking the money you have to know that you might watch it continue to rise, but who cares?? Take your money and leave!!!
I hope this will help some traders that are new to penny stocks save a little bit of money. I know I wish I would have read a great article about penny stocks before I started trading them. Happy trading from picksthatmakecents.com!!!
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on August 25, 2010. Filed under 
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