The variability of trading profits in penny stocks (or the financial markets as a whole for that matter) are difficult for most new traders to fully comprehend. The reason for this is pretty clear once you think about all of the potential outcomes of any trading decision that you make. For example you can make a good decision and be rewarded with a positive outcome resulting in a profit. You can also make a good decision and end up with a negative outcome which results in a loss. This is where trading defers from most other businesses because good behavior can be punished..
On the other side of the spectrum, you can make a bad decision and naturally end up with a negative outcome and therefore experience a loss. You also could make a bad decision and end up with a positive outcome experiencing a profit. Again bad decisions in trading are sometimes rewarded and this is where you can get in a lot of trouble if you don’t know what to watch out for.
What’s very important to understand is that chance plays a small part in every trade that you make and especially in the beginning of your journey to consistent profitability, you need to make sure that you don’t let these outcomes control your psychology. This is why it is so essential for you to utilize a trading plan which ultimately incorporates a great majority of the potential outcomes and issues you may face, so that you can follow a frame work for making proper trading decisions. By keeping your emotions out of the decision making process you will increase your chance of success ten fold…
Without a plan new traders may become overconfident in their abilities when for example they put on a trade with no reason and it ends up going in their favor. Maybe this happens several times in a row and then because of this a person decides they have figured out the market and therefore choose to increase their position sizes substantially. Because of this impulse decision they end up increasing their risk level and exposing themselves to the risk of ruin. Alternatively maybe a new trader lose several times in a row and decides to give up or decides to reduce their trading position. Consequently, on the next several their trades the stock ends up going in their favor and then their profit ends up only being a fraction of what it should have been.
Earning consistent profits requires having an edge. Now contrary to what most would be traders think and edge does not have to be large. Instead it just requires taking small to mid size profits, a few unexpected large winners and predetermined and manageable loses. Unfortunately for uninformed traders emotions shapes their trading decisions and this usually means a few small profitable trades and one or two huge loses which inevitably wipes them out before they have ever had a chance to develop their trading skills.
What a new trader should instead do is be completely aware of the info mentioned above so that they can avoid becoming overconfident, and at the same time protect their capital with proper money and risk management at all costs. By doing this they will greatly improve their odds of success by insuring that they stay in the game long enough to beat the learning curve.
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