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Six Key Rules of Trading Penny Stocks

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 hardly a shortage of such companies, but to be successful, you need to create a penny stock investing plan, and that includes following the most basic rules every penny stock trader should observe.

1. Keep to limit orders.

As explained by their nature, penny stocks are very thinly traded. Thus, the deviation between the bid and the ask is often substantial. Investors using market orders may be at the mercy of market makers seeking a quick buck. Using limit orders is the best way to avoid this scenario. That means, when you buy or sell penny stocks, your terms – not the market makers’ – will be followed.

2. Trade within regular hours.

In an absence of volume, the outcome could be after-hour trades that hardly make sense and never represent a good buyer-and-seller match. With penny stocks, even a few pennies can make so much difference. For the most efficient trade, keep within regular trading time.

3. Avoid chasing performance.

For some reason, investors can decide to buy only if a stock goes higher. As a stock soars, these folks believe that it’s safe for them to make a move. 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. Maintain your holdings at 20-30 positions.

This one is a golden rule. Maximum gains could be achieved with 20-30 positions. Returns will be diluted if you get more than that. Lower than that means a performance that lags significantly. Worse, if you buy too few stocks, you will likely lose big.

5. Have a reason for trading.

It’s fine to own a stock that already has already moved up in value provided you have a good reason for doing so. “These reasons can be aptly called “triggers. If a stock has no trigger, it will never take off.

6. Expect three months as average holding period.

Finally, take note that penny stocks can be highly volatile, rising up and crashing down very fast. Big gains can be expected up to within 90 days. If that move does not take place, check out your next opportunity. Sometimes, you’ll have to go back and forth with a single stock due to its volatile nature. Don’t expect rapid-fire day trading, but if you believe a stock’s value is going down and vice-versa, don’t think twice about selling it.

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