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When you are trading penny stocks, you are already taking huge risks. You know that going in. One of the biggest and dumbest mistakes I see happens comes when people have a clear profit and fail to take that profit. They have no exit plan other than luck. Or maybe love?
How to Take a Profit on a Penny Stock:
Let me set the table here. Likely you trade penny stocks. Likely you buy penny stocks quite often, only to find out that the penny stock you chose actually was up about 15% or 20% the same day you bought – even after you bought it. Somehow, as the day came to an end, it fell to about what you paid. The next day it opens slightly below what you paid. Maybe it hits a 20% gain again the second day? Maybe it is up even more? A few more days go by, and suddenly you note that it is no longer crossing the price you paid. It is doing some kind of slow decline. You follow it for about three weeks and then you finally sell it with a loss of about 50%. Maybe that is down as much as 75% off the highest price it traded at after you bought in originally.
How can you win?
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It’s simple. Before you ever buy a stock, you decide on a profit percentage you want and you be prepared to lock in the price as a good til canceled sell order until it does, in fact, hit that price. Here it is in a step-by-step process:
- 1. Decide on a stock that fits some basic criteria. I thing a stock should trade about $50,000 per week ideally, and no less than $35,000 per week. If less than that, your ability to ever breakout even or better is likely nil.
- 2. After you decide on a stock and it fits your criteria, decide on a profit percentage that you are comfortable with. That might be 10%, 15%, 20% or even 50%. Make sure you add both the fees for buying and selling into this decision. This percentage should take that into account. Let’s say it trades at $1.00. With fees you calculate that the gain you want is 20%, making the price with all fees about $1.24 per share to get that potential gain. Ask yourself, “Do I really think it can trade at $1.24 soon?” Ask another question, “I want to buy 5000 shares of this, and it typically trades 35,000 shares a week. Will my buy drive up the price and will my sell drive down the price?” The answers to the volume questions needs to be no.
- 3. Buy after about the first hour. Don’t buy late in the day. After reviewing Number 2 above you got all of the right answers, place a buy order that likely gets you the number of shares you want at near the lowest price of the day. Yes, you never know what that is going to be. You have to look at how its traded. Note that you may not get the shares at all if you are trying to get them at a lower price than the market would like to give them to you. Personally, I have always felt it was a bad sign if I got the shares too easily. Let’s say you got the shares at the $1.00 price you wanted. You are so lucky, right?
- 4. Now – you see the confirmation come in. Yes, you are now an owner of the next AAPL! Love sets in. Don’t fall too deeply, it’s time for that sell order. Yes – you just bought the shares, now put in a GTC (“good til canceled”) order to sell the shares. Here you will simply put in an that is good til cancelled for all of the shares at the price of $1.24. Note that the very momentum of buying will often propel others to buy, and your sell order may be filled the same day as the your euphoria spreads to others. That’s good. No – that’s great. You lock in a profit and you are out.
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Important Things to Consider:
Some methods with penny stocks take a lot of money to do right. One of the great things about this method is that the fewer dollars you put into it, the more likely it is to work. If you buy too much of one stock, you will find that as you sell you are driving the price down. You will find that in low volume stocks, your trading messed up the game. That is why things occasionally work great on paper, but fall flat when trading for real.
Never underestimate the negative affects of volume on any strategy. You should likely never own more than 10% of a week’s average trading volume. By average, I really mean that you look back about twelve weeks. You might even thing of not owning more than 10% of the slowest week during that twelve weeks.
I used to get about 50 emails from people daily early on in the thirteen year history of StockGuru. I used to see many people talking about a gain they had. Should they sell? I could never give them advice, as we picked stocks and never gave specific recommendations on what an individual should do on a particular day with a stock. Many would write me two or three months later telling me how they lost of the stock where they previously were up. I would see the email charing from particular people who loved picks while they were up, and assumed up would continue (and continue, and further continue) until it fell off a cliff one day.
Usually they fell in love with particular stocks. Love is for a mate, not a stock. Stocks do not comfort you when you are sad. They do not pay the rent when they are worthless. They do not put down payments on your home when you are running short of money. Finally, they do not pay your kids college education when they are at $0.0001.
Take those profits. Let the other sucker love the stock!
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