1. Volumes of shares traded
When investing look for stocks that trade at least 100,000 shares every day. Trading companies with low or non-existent volume is risky, it could be difficult to sell your shares even if the price rises. You should keep an eye on the number of shares traded and only trade stocks that are above 50 cents a share because they are not liquid enough to trade. Looking at the average volume of shares traded can mislead investors. If stock XYZ trades 1 million today and only trades 50,000 shares for the rest of the week, then the daily average will appear as 240,000 shares. To enter and exit a trade efficiently you need consistent, stable volume.
2. Don’t attempt to short sell penny stocks
Trying to short penny shares is the best way to blow up your account. Finding shares to short of pump and dump stocks can be difficult and frustrating. They are just too volatile to short sell especially for inexperienced traders. Also you could get short squeezed and be forced to cover your shares, which will send the stock price even higher (this is rare).
3. How did you find the stock ?
Alot of people find about penny stocks through spam and free newsletters who pump the stocks (however there are also some decent newsletters where you can get stock advice). All the insiders load up on shares, then dump the worthless shares to newsletter members, causing the share price to plummet. Never invest more than 20% of your portfolio into one penny stock. No matter how sure you are of the company share price rising, never invest more than 20 percent of your portfolio, learn to manage your money better.
4. Always read disclaimers
Free penny stock newsletters do not give away free stock tips because they are trying to help you, they’re always have hidden motives, which is to pump then later dump the stock. If you read the disclaimer at the bottom of the promotional emails, it will mention how much the company is being compensated. CEO’s of these companies are desperate to raise capital and gain exposure, which will lead to promoters making false promises or give misleading information.
5. Don’t be afraid to take profits quick
If one of your investments goes well and you capture a 70% gain, try to sell some but not all of your shares. E.g. if you’re up 150% on a trade, sell 70% of your shares and let the rest ride, so you gain from another upward momentum with less risk. Unfortunately greed kicks in and investors hold shares aiming for a 200% return. You might have invested in a penny stock that has been hyped up and the best option would be to move on and wait for the next play.
6. Be careful with position sizing
Don’t trade more than 10% of a stocks daily volume. By limiting your share size this will enable you to get out of the stock faster.
7. Cut losses short
When a trade is going against you. always cut your losses short to limit the damage to your portfolio size. I always try to cut my losses short at 10-20% depending on the situation. This is easier said then done and requires a trader to mentally strong and doesn’t let his losses affect him in future trades. Also when share price decreases, averaging down can be bad habit, as you could be throwing good money after bad.
8. Use limit orders rather than market orders
Its always better to use limit orders with penny stocks rather than market orders and this applies for both buying and selling. By using a market order, you could end up paying more than the price you had planned. Every once in a while it may be more appropriate to use a market order. I use market orders when I am accumulating a large position, purchasing blocks of shares. This approach is not ideal for beginner investors