Just deciding that you’re ready to add penny stocks to your investment or trading strategy is not enough. First of all trading penny stocks as a whole is not an investment strategy, it is simply a bucket of stocks with a loosely defined term.
Most consider a penny stock as any company who has a price per share less than $1. Others say a penny stock is any stock not traded on the big exchanges, so they trade on the OTC markets like the pink sheets. Others say penny stocks are simply nano-stocks or ultra micro stocks with market values less than $2 million dollars. The $2 million dollar value is even questionable. So defining your penny stock is your first step, but I’m going to say for this discussion a penny stock is any stock with a market value less than $2 million regardless of the exchange.
Determine Your Portfolio Size
Your portfolio size has a huge impact on what type of trading or investing strategy you will use. Unfortunately this step is often skipped because marketers and book writers don’t want to limit their base to only people with money. Not having enough money for a stock trading plan is a recipe for financial doom.
Let’s look at why this is the case. Your risk on any trade is partially impacted by the amount of portfolio risk on each trade and the spread you have to cover to profit. I prefer to say that you should never risk more than 2% on any given trade. Also, you never want to spend more than 2% on commissions (less is better.)_____________________________________
Determine Your Time Frame
If you are a working stiff and don’t have time to watch your stocks minute by minute than you aren’t going to become a day trader (if you actually want to keep that job.) However, if you are a hyper active data crunching machine than swing trading might be up your alley. Determine the time frame in which you are capable of trading.
Determine Your Style
Accepting who you are is a huge part of becoming a successful investor. When it comes to penny stocks the volatility is higher and the liquidity is lower. If you don’t like a little extra stress for your risk then walk away from the idea of trading penny stocks now. If you’re still here then you need to know if you are in it for the excitement and big wins or just looking to boost your returns a little. Perhaps you really like researching unheard markets or staying ahead in a certain industry. Just take some time for a little self reflection.
Putting it All Together
Now that you’ve built a little template for yourself of time, money, and style look at different strategies and see if they will be a fit for you. If you want to trade with only a $500 dollar account you are limited to one all or nothing trade at a time because the commissions will eat you up otherwise. If you are restricted to daily trading than please take scalping off the table, the opportunity will be lost by the time you get back to the computer. If you are doing fundamental research on penny stocks that you intend to hold for all or nothing, make sure you pick enough different stock to not violate the 2% risk rule.
Once you accept who you are picking the right stock trading strategy shouldn’t be difficult at all. If you can’t trade the strategy you want you may need to change your personal situation.