Nobody becomes a master trader overnight. It takes a process of growth and evolution to become a highly profitable trader. More and more people are making money from penny stock trading but the majority is still taking more than their fair share of losses. The following tips will help you to limit your trading risk.
1. Don't trade against the market
Study the market until you have a clear picture of the market direction. Absolutely do not enter the market and risk your money if the signals are not clear.
2. Establish an entry point
Make a definite decision of the point at which you will enter the trade for any penny stock .This is a very important part of your trading strategy. You might use the plain vanilla stock quotes or candle stick charts but the most important point is that you have an entry point.
3. Look out for serious buyers
The presence of serious buyers is one of the indications of a penny stock's potential. Look at the Open Book or Market Maker window and Tape. Don't trade if there is no order flow on the Tape or the order sizes are small (less than a 1000 shares).
4. Have an exit price.
As with the entry point the exit point is very important in a good penny stock trading strategy. Before purchasing a penny stock, you need to decide what constitutes good profit for you. This is the point where you sell and get out of the trade.
5. Use a protective stop loss
This is the most important part of any penny stock trading strategy. Every trade position you take comes with a measure of risk. A stop order can protect a trading position in case it is unprofitable. Do not wait until you get into a trade before deciding how much risk to take. Determine the amount of risk beforehand by using and sticking to a 'Maximum Define Loss'.
Ideally a maximum risk is set at about 3.5% for a day trading and about 10% for long term trading. For example a day trader trading with $5000 should not risk more than $175 on any trade. Do not overlook this important component of your trading plan to keep loss at the minimum.