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Six Basics of Penny Stock Trading

Penny stocks, also referred to in some countries as cent stocks, are common shares of small companies trading at low prices a share. There is barely a shortage of these companies, but if you want to be successful, have a penny stock investing plan that starts with observing the most essential penny stock-trading rules.

1. Use limit orders every time.

As explained by their nature, penny stocks are very thinly traded. Thus, the deviation between the bid and the ask is often substantial. Investors who use market orders could be played by market makers who just want to make a quick buck. Using limit orders is the best way to avoid this scenario. That means you will be buying or selling penny stocks on your terms, instead of the market makers’.

2. Keep within regular trading hours.

An absence of volume can lead to after-hour trades that are illogical and most definitely do not represent a good match of buyer and seller. With penny stocks, you can make or break a trade with even a few pennies’ difference. Sticking to regular trading hours allows you to elicit the most efficient trade.

3. Never chase Performance.

For some reason, investors can decide to buy only if a stock goes higher. When a stock flies, these investors believe the environment is safe for them. They may be wrong. Typically, by the time they decide its safe, the opportunity has passed them by, and then losses come in. What’s safe is when you keep to new recommendations and the buy limits that accompany them.

4. Keep your holdings to 20 to 30 positions.

This one is a golden rule. Maximum gains could be achieved with 20-30 positions. Returns will be diluted if you get more than that. Lower than that means a performance that lags significantly. Worse, if you get too few stocks, you get the risk of huge losses.

5. Trade with a reason.

Provided you have good reason for doing so, there is nothing wrong with owning a stock that has climbed up in value. “You can call these reasons “triggers. If a stock has no trigger, it will never take off.

6. Expect three months as average holding period.

Finally, take note that penny stocks can be highly volatile, rising up and crashing down very fast. Large gains may be expected up to a 90-day maximum. If that move does not take place, check out your next opportunity. There are times when you may have to go back and forth on a certain stock due to the volatility. You won’t see any rapid-fire day trading, but if you foresee a stock’s value going down and vice-versa, the best thing to do is to sell it.

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