In theory, it is not that difficult to understand how to trade penny stocks profitably. A profitable trader must create a trading plan and then follow it flawlessly. They merely need to buy low and sell high, or short sell high and buy low. The problem for new traders is that most don’t know what a trading plan actually is and the ones that do, haven’t taken the time to actually develop one. Unfortunately, they buy penny stocks with a complete lack of disregard for reasons why penny stocks move up and down. They treat penny stocks as though they are gambling rather than operating like the house. In the process, they read message board postings or social media and try to follow other traders who are most likely just as uninformed as they are. In the unlikely event that they get lucky, they have no idea of when to take their profits. However, more commonly they will lose all of their money because the great majority of traders are unprofitable and therefore do not know how to find penny stocks to trade.
The reality is that 5% of traders have certain skills related to the market that the other 95% of traders do not. These are skills are not innate but instead were developed by studying the penny stock market for an extended period of time. They were learned by spending a few hours per day over several months, in order to recognize how traders, make money. They are a direct result of an educational process of trial and error which includes devising a trading system, practicing via simulated trading, and then lastly, only then going live with real money. Throughout this process, a new trader goes from consistently losing money, to breaking even and then finally earning consist of profits. They also learn that trading penny stocks is more complex than then they initially thought and that they need to either hone their skills by educating themselves or they are going to fail miserably.
Getting over the learning curve is not an easy process, but this really is the only way that a new trader can combat the barriers to entry. During the learning phase, a trader will go up against various challenges such as beginners’ luck resulting in overconfidence, trading too much, and the fear of missing out (FOMO). If they are able to stay in the penny stock market long enough, they will start to experience light at the end of the tunnel. First, it may just be a day or two of profits, but eventually, that will turn into several more profitable days in a row. At some point, they will have a series of 10 or more profitable days in a row and at this point, they will start to realize that their success has nothing to do with luck anymore. As the days, weeks and months go by, a trader will start to build upon their experiences and find out how to enter and exit their trades more efficiently. The sense of accomplishment will turn into confidence and it will increase as time goes on. This confidence allows traders to increase their position sizes which consequently allows for larger profits.
Unlike most new traders believe, there aren’t any major secrets in which the top 5% of winning traders are hoarding amongst themselves. There is a daunting amount of both free and paid content available online, which could allow a person to profit. The difficult part of the equation is determining what is actually useful. Bearing in mind that trading is counterintuitive to what most people think, newcomers to the penny stock market generally don’t know where to begin. So, they start out on YouTube or Twitter, and they watch a few tutorials. Not knowing any better, they get conned into following some guru and subscribe to some subscription penny stock alert service. Next, they open a small account with $500 or $1000 and after several bad trades they find out the hard way that maybe trading isn’t as cut and dry as they thought. Unconsciously, they attempt to guess which direction a penny stock is heading and they have a false impression that losing is avoidable. Most of the time they follow blindly and do not even know what they are buying or selling. This isn’t a unique problem that just a handful of people face. Most new traders start out this way and only after losing their money, so they realize they’ve been bamboozled. The fact is, human beings are human and most act in a similar manner. They want the easy way out and they want everything handed to them on a silver platter, but in the world of penny stocks, this is just not how it works. This is why the gurus are able to profit because they learn to take advantage of basic human behavior. It is also the reason why smart traders can profit because they figure out how to take advantage of the poor decisions of new traders.
When a person is able to start finding high probability trading opportunities, it is at this point they find separate themselves from the losing traders. But coming to this conclusion means making trading decisions completely independent of outside influences. At first, this is a daunting task because a new trader has no idea what they should or should not do. But throughout their learning process, they figure out what worthwhile opportunities actually mean, by making sure that the upside potential on trade can offset the risk. Penny stocks by nature are very risky and therefore, these are the only times when trading a penny stock can make financial sense.
Next, they must understand that where a trade is entered is less important than the exit. It’s not so hard to make money trading penny stocks, but it’s much harder to keep unrealized profits that have not been locked in. Knowing how to manage a trade is a much more important part of the process than the entry. To do this requires a trader to take control of their emotional biases and that’s a pretty important step, because a trader who is controlled by fear, greed, euphoria, and a number of other emotions, is incapable of managing their losses. Since traders have no control over where the price of a stock is going, they need to focus their attention on what they actually can control.
New traders generally are so worried about losing trades, that they never sell their losers because they believe that they will eventually turn around. Simultaneously, they close out their profitable trades too soon in order to soothe their own ego and prove that they know what they are doing. Although this process may make them feel better about themselves, it will not hide the fact that the trading equation only works when average winners are greater than losers. There is a big difference between being a trader and being an investor, and when you start holding a penny stock for more than a short period of time in hopes you can recover your initial cash outlay, you are no longer a trader. Successful traders take small, manageable losses because they know that their money is more valuable to them when they can deploy it on many trades. Unfortunately, when a person lets themselves become trapped in a stock, they give up their ability to trade and consequently end up as a long-term investor. Protecting one’s trading capital and avoiding getting trapped in a stock is the key to long term success in penny stocks.