The most important part of trading penny stocks is the time you put into creating and maintaining your plan. Your plan is your rule book that will help you make decisions quickly. Your plan is your confidence that helps you make the tough choices every time so you keep winning. Your plan is your tether to reality so you don’t become a big shot and start gambling instead of trading.

You can’t ignore this valuable time that will help you develop your plan. You should spend one month studying, at least one month back testing, and at least one month paper trading penny stocks before you ever trade a single real dollar. Don’t be compulsive; be methodical.

Reading

Before you start researching where to buy penny stocks, it is important to gain knowledge in many areas so you can develop a trading plan. You don’t have to be an expert in everything, but you won’t discover your “ah ha” moment until you come across the right concept. There are as many different stock trading strategies as there are personalities, but the standard trading plans won’t necessarily match your style.

I recommend reading about technical analysis, market psychology, risk management, money management, and even self improvement books. You don’t have to become an expert in all of these. Just start with beginner books in each category and just keeping following the path that you enjoy. For me I love the math of risk and money management. Therefore I like to fine tune the amount of risk on every trade balanced with win/loss ratios with lots of trades for the law of averages to work itself out. Each stock trading strategy will involve recognizing human behavior to some degree in chasing stocks or bailing out of them in different situations and jumping the trend in advance.

Back Testing

Back testing is used to fine tune your plan. You can tweak the constants, the go – no go points, or just how much you risk on any given trade. This is the best time to experiment with your plan on different sectors, new penny stocks, old penny stocks, penny stocks that were on the normal exchange prior, or any other variation you can think of. My only piece of advice is that you don’t add more than three factors to consider on any given trade. After three you begin to over tune to the past. Essentially you’ll build a plan that doesn’t match any reality that has happened in the past. You’ll generally find amazing returns in your back test that just never come true when you are actually buying penny stocks. Keep the plan simple and distinct.

If you’re trying to find a stock before it starts moving then choose unique numbers to look at that the normal books don’t talk about. If you’re looking to chase a trend then use a modified version of a very standard trade plan that can be found in one of the popular investing books. That way you can find the movement just after everyone else does, but bail out before everyone else does.

Paper Trading

Paper trading is used to test your ability to follow through your trading plan. The most important tool in this phase is your trade journal. You need to take notes of all your trades and all the trades you chose to pass up. When you come across a trade that matches your criteria, but you don’t execute on the trade note why you didn’t make the trade. Be honest with yourself, this is for your own good. Then follow that stock to see how it performs even though you didn’t choose it. If you find you’re not comfortable making your trade, or the returns just aren’t representative of your back testing then your trade plan isn’t ready.

You don’t want to continue experimentation once you begin trading so get yourself comfortable now, while you are practice trading. Once you begin trading penny stocks you need to keep following the plan until you fully develop a new plan. Don’t use your money for on the fly changes.