While penny stock trading is a great way for investors with small or limited capital to take advantage of the associated volatility of small companies, they’re also risky investments. If you want to include penny stocks in your trading strategy, it’s important to be aware of the biggest mistakes penny stock traders make, so then you can avoid them and improve your trading results.
Using money you cannot afford to lose
Trading is stressful enough without having the additional (and entirely avoidable) pressure of trading with money that you actually need. Moreover, trading is a risky activity that can result in capital loss, and you need to be prepared for this eventuality – you won’t be able to win every time. One of the first rules when trading penny stocks is to only trade with money you can afford to lose. Never borrow any money to invest in the markets, and be sure you never trade with your emergency savings.
Not having a proper trading education
Making profits while trading penny stocks isn’t hard per se, if you know what you’re doing. However, starting your trading journey without knowing what penny stocks are and how trading works is one of the most dangerous penny stock trading mistakes you could possibly make. To trade with confidence and minimize your risks, you need to have the right training to master the basics and build a strong foundation to successfully trade penny stocks.
Trading penny stocks without a trading plan
To trade penny stocks successfully – or any other market for that matter – you need a trading strategy. Once you know which kind of trader you are, you can determine your trading style and work on your trading plan. This plan will describe in detail your strategy, with the setups to follow to enter, exit, and protect your trading positions.
Underestimating the risks involved in trading penny stocks
As penny stocks do not represent companies traded on recognized exchanges, they’re riskier than traditional stocks. First, they do not have to comply with mandatory information-sharing requirements like quoted companies, which means that they’re less transparent. Secondly, they are less liquid than more well-known stocks. It might therefore be more difficult to enter and exit the market at your desired price. Finally, they are quite volatile stocks, meaning that the price can swing quickly against your position.
Not waiting to have an edge to enter the penny stock market
Penny stocks usually move up and down following a catalyst, strengthening either bullish or bearish momentum. Don’t simply follow your friends’ or neighbors’ advice without doing your own research, and be sure that there is a real trading opportunity. You can read expert analyses and comments on penny stocks, but once again, do your own research to be sure that the top picks are following your entry setups before jumping in.
Having the wrong trading mentality
Emotions are often underestimated by traders, but they have a huge impact on your overall performance. Fear, overconfidence, greed, and impatience can lead you to not follow your trading plan, which will, in turn, potentially lead to costly mistakes. It’s important to break bad habits and understand the importance of trading psychology, as you need to control your emotions and be aware of cognitive biases to succeed in trading.
Not tracking your trades with a trading journal
Without monitoring your trading positions, you won’t be able to know what to improve to enhance your trading results. Using a trading journal helps traders be more disciplined by tracking their progress. It also helps them better see their own strengths and weaknesses to improve profitable setups. A trading journal is also a great tool to help you master your emotions and improve your risk and money management.
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