Chapter Eleven: Penny Stock Trading Rules

Penny Stock Trading Rules

Finally: Penny Stock Trading Rules. Now that you know what to look for when it comes to evaluating penny stocks and how to trade them, I want to share a few of the rules I’ve developed over my many years as an active trader. These rules guide every decision I make, from what I think of a particular stock to how and when I decide to take a position.

You might decide to come up with your own rules as you get more experienced, but when you’re first starting out, following these rules will protect you from the kinds of huge losses that can wipe out an amateur trader’s entire account.

I’ll cover them briefly first, then expand on how I learned each one later on in this chapter:

Tim’s Rules for Playing Penny Stocks

• Be nimble. Since expectations can change so fast, you have to stay nimble. You have to preserve your capital so that you can take advantage of these shifts when they occur. Forget about being diversified—you don’t necessarily need that. I know you’ve been taught that since day one, but try to de-learn it for pennystocking purposes.
• Be conservative. Never risk too much of your capital in any one play. I’ve lost as much as $500,000 dollars on one stock, and it hurt. I want to save you from that hurt, so you have to trust me on this one. Just be conservative. Never put 100% of your portfolio into a single position, and never hold more than 50% of a company’s daily shares traded. More importantly no matter what percent of assets used, always follow rule #1: cut losses quickly. Keep losses small so you don’t make the #1 mistake people make: hoping for comebacks. Sometimes comebacks happen but why EVER risk disaster? If you’re right about a stock, the price action should show it quickly.
• Be thorough. There’s so much information out there. Yes, it’s a simple market, but there’s still a lot of information. You have to research every potential lead. Most of it, granted, is random noise, but if you skip over the research part, you risk missing an important piece of the puzzle. The greater understanding of each play you have, the greater your odds of success. That’s what it’s all about—you have to give yourself the best chance.
• Always monitor the overall market. Three out of 4 stocks follow the overall market, and penny stocks are no different. They’re a little more independent, but not by much. The overall market does matter, and you need to know which way it’s heading.
• Don’t overextend yourself. It surprises a lot of people, but I never take on more than 2-4 positions at a time. Usually, I only take one position. And again, I’m not risking a big piece of my capital—I’m risking maybe 5% or 10% of my capital every time I trade. There just aren’t that many good setups out there. Don’t rush things or try to push trades that aren’t there. Be patient and wait for the patterns you know to appear.
• Be able to go long or short. This is so key. Stock trading is like a pendulum—some stocks go up and some stocks go down. You need to be able to go either way. Momentum swings both ways, so if you can go both ways and can profit from either direction, you’re a lot better off. You don’t have to bullish all the time or bearish all the time, because you don’t care as long. As the market moves one way or the other you’re set.
• Take your losses quickly. No matter how much research you do, sometimes, you’re just going to be wrong. Everybody is wrong from time to time, but the question is, can you admit it? Can you learn from your mistakes and move on? If you can, you’ll take your losses quickly and save yourself a lot of money in the long-run.
• Take your gains quickly. Why do people say to ride your gains? Forget that—this is pennystocking. You need to make money, and then you need to get out. These stocks are so volatile that you’re not investing, you’re pennystocking. You ride the price momentum as long as you feel comfortable, but remember that it’s better to exit too early than too late.
• Learn about the companies. You must consider all the variables because while it’s nice to focus just on the charts, companies are living, breathing creatures that influence the charts too.
• Simple is beautiful. There are so many different technical patterns out there that I can’t even come close to listing them all in this guide—I can’t even keep track of them all myself. For the most part, stick to buying stocks that are making higher highs and short selling stocks that are making lower lows. I’m not inventing anything new here—I’m just using this stuff and telling you the basics.
• Don’t discriminate. Discrimination is bad. Be willing to trade any company and any industry. If you wait around for the perfect healthcare startup or technology penny stock, you’re going to miss out on great opportunities in other industries. The one exception is the oil and gas industries, which have unique qualities. You can’t rely on the charts alone for oil and gas plays because they’re tied to the commodity price. So understand that and exercise caution with these companies.
• Aim to profit 50 cents to $2 dollars a share. Since these are penny stocks, we’re trading stocks between $1 dollars and $5 dollars a share. Sometimes, they go up to $10 dollars, but this is the exception—rather than the rule. Instead of betting whether or not a company’s going to double, you’re just trying to make 5% or 10% on your investment and then move on. Don’t try to aim for huge price gains of $5 dollars to $10 dollars a share. Instead, focus on taking solid profits from solid patterns. It’s very nice and easy. This doesn’t apply to lower priced stocks so for stocks under $1-2/share, aim to make 15-30% on your money even though thats a lower centers per share profit number.
• Take comfort in your ability to play. Remember that 90% of traders lose money and give up. Forget that. I can’t even imagine that. I don’t know how I’ve stayed in the game this long, but I have. I’ve stayed in the game at all costs and I continue to learn.
• Think of yourself as a retired trader. Only trade and “come out of retirement” when a play is so good, long or short, that you’d feel guilty missing it. Obviously you’re not a retired trader, but having this mentality of NOT HAVING TO TRADE keeps you from making bad trades/scalping. Far too many traders are addicted to gambling and wanting “action” to feel an adrenaline rush, not solely for the profits they should be focused on

Even when I’m down, I’m not out—I’m still in the game. There’s always going to be more opportunities, but if you can’t survive—if you don’t have capital to stay in the game—you can’t win. So stay in the game and give yourself that chance to win—even if you might not necessarily win every time.

So what can you learn from me? Tons! I’ve had both gains and losses, and I think you can learn from them both. But just to keep things positive, I’ll start out with some of the lessons I’ve learned from my big wins…