When Should You to Sell a Penny Stock?
Knowing when to sell a penny stock is an overlooked aspect of trading. The decision to sell a penny stock has a big impact on whether you profit or lose from a trade. Selling too early can be the worst feeling in the world, watching your stock climb higher and higher, thinking too yourself if I only had the balls to hold on longer I would be alot more wealthier. Don’t sell all your shares at once, sell over a period over a couple of days or months scale out of your position if you are happy enough with your profits.
Before you make the final decision to sell, a number of factors must be considered. In my opinion the best way to sell is by scaling out of your position over time. By doing so, I find that it helps reduce my stress levels. For example if you own $20,000 worth of stock and it goes up over 50-100%, it would be wise to sell half or maybe three quarters of your shares and let the rest ride. If share price continues to spike higher you will have captured not all but some of the upside gains and will feel alot less guilty then if you had sold all of your shares at once.
On the other hand being greedy and not taking a decent profit when it was available, kicking yourself that you didn’t cash out when you had the chance. Consider these indicators when deciding to sell or hold onto a stock:
- How high is your risk tolerance – Can you handle much pain.
- Is there better investment opportunity elsewhere.
- Risk to reward ratio.
- You may need the money for something else.
1. Technical Trends of a stock
Is the stock price in an upward, downward or sideways trend? An uptrend means that a company has 2 or 3 up days for every down day. This would mean the price would move higher month after month. Some trends can last months maybe days. By buying in early into a decent upward trend, you could profit significantly. To eliminate risk only invest until it is clear the stock has begun a new uptrend. Once the trend is over its time to exit your position.
Once a stocks uptrend or downtrend is over is can start to trade erratically, given you less of a chance of profiting from future price movements. Its common for a trend to reverse. Learning to find trend reversals can be extremely profitable. To help to spot a tend reversal before the crowd look out for the momentum and trading activity of the stock. The most important trend reversal patterns are the topping out and bottoming out patterns.
Support and Resistance levels tend to hold at round numbers like $1.00, $1.50, $2.00. This is a tip I learned from legendary investor Jesse Livermore. This tends to happen because investors tell their brokers to buy or sell at nice round numbers. Volume tends to increase when share prices approach support levels. Buying pressure increases at these levels and will potientially keep the price over support. Also support levels can fail, which can take out stop losses causing a sharp stock decline. Several support levels may exist for a single stock, but each support levels can be weak, strong or moderate. Generally when a stock falls below support, it can become resistance.
These are caused by an increase in selling activity at aa particular price, making it harder for it to rise above a certain level. Resistance levels can be a great place to take profits.
2. The Reason Why You Bought The Stocks
Does the reason why you bought the shares still apply? Has the companies prospects improved? If the companies growth is too slow, its profit margin is decreasing/ debt is increasing or its not executing its business model to your model, it may be time to sell.
3. Volume of shares traded (Trading Activity)
Increases in trading activity is usually positive for penny stocks, unless there is a major sell off. High trading activity could mean the penny stock is getting alot of exposure. If volume of shares traded is decreasing or non-existent, this would be cause for concern and you may have difficulty selling your shares.Judging whether a stock has high or low trading activity comes down historical averages.