Although this entry is about the psychology of buying good penny stocks, it is different from others. Today, I will try to focus on the mindset needed to trade hot penny stocks.
As human beings, we often let our emotions impact our decisions. Sometimes those emotions can help us, but they often hurt us at times too. And when buying or selling any stock, those same emotions can cost you your hard earned investment capital. With that being said, these mistakes can vary, in both degree and consequence. For instance, lets use General Electric as an example (GE:NYSE). Just imagine that you have a position in this solid large cap name, and then assume you make a mistake trading it. Now nobody ever wants to lose money in the market. It doesn’t matter if that mistake is in a mutual fund or a top notch, or in a basket of good penny stocks. In reality, the account statement at the end of the month doesn’t discriminate, it just gives you a balance. However, let’s just say your loss or mistake in GE was semi-normal. A big up or down day on a Dow stock usually consists of a 2 to 3 percent move. My point is those types of mistakes can usually be dealt with in listed names, if you have a plan and focus on a solid risk/reward strategy.
The game is much different when an investors deals with both bad and good penny stocks. Too often, I have seen many investors bragging about making $2000 in a penny stock transaction. Now don’t get me wrong, there is nothing wrong with taking a profit, but many people don’t realize that penny stocks are often difficulty to get out of. So that $2000 profit may have come by investing $30000 and potentially risking $5000. That risk/reward scenario doesn’t make sense.
Now there are many ways to trade, to set stop loss orders, and to scale out of positions.The key is to pick a trading strategy that fits your style, and more importantly your personality. If you are super emotional, write down your desired profit and acceptable loss before you do the trade. Also, don’t be afraid to scale out of a profitable position in thirds or even quarter pieces. The commission structure of most firms that deal in online penny stocks make this possible. Remember, good penny stocks come around more frequently than you think.
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