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Six Cardinal Rules of Penny Stock Trading

Penny stocks, also referred to in some countries as cent stocks, are common shares of small companies trading at low prices a share. There is barely a shortage of these companies, but if you want to be successful, have a penny stock investing plan that starts with observing the most essential penny stock-trading rules.

1. Keep to limit orders.

Because of their nature, penny stocks very thinly traded. Hence, the difference between the bid and the ask can be huge. When investors use market orders, they can be tricked by market makers who want to make some fast money. Using limit orders is the best way to avoid this scenario. That means you will be buying or selling penny stocks on your terms, instead of the market makers’.

2. Trade within regular hours.

When there is an absence of volume, the result could be after-hour trades that are nonsensical and most surely do not represent an efficient buyer and seller match. With penny stocks, you can make or break a trade with even a few pennies’ difference. Sticking to regular trading hours allows you to elicit the most efficient trade.

3. Never chase Performance.

For whatever reason, there are investors who only buy after a stock moves up. When a stock flies, these investors believe the environment is safe for them. They may be wrong. In most cases, by the time they decide it’s safe, the opportunity is no longer there and losses have replaced them. What’s actually safe is to stick to new recommendations and the accompanying buy limits.

4. Keep your holdings to 20 to 30 positions.

This is a golden tip. You can achieve maximum gains with a portfolio that consists of 20-30 positions. More than these numbers will only result to a dilution of returns. Less than that and performance lags considerably. Worse, if you buy too few stocks, you will likely lose big.

5. Have a reason for trading.

Provided you have good reason for doing so, there is nothing wrong with owning a stock that has climbed up in value. “You can call these reasons “triggers. There’s no taking off for a stock without a trigger.

6. Expect three months as average holding period.

Lastly, keep in mind that penny stocks are extremely volatile creatures that can rise and fall any minute. Big gains can be expected up to within 90 days. If that move does not take place, check out your next opportunity. Because of the volatility, a stock may have yo going back and forth sometimes. You won’t see any rapid-fire day trading, but if you foresee a stock’s value going down and vice-versa, the best thing to do is to sell it.

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