Posted on 10 December 2011.
Learning how to play penny stocks can lead you to earn a lot of money in a short period of time. However, if you do not learn how to do it safely then you can also lose everything. Trading these low-priced stocks is not for beginners. You will need every bit of wisdom that you have acquired trading on the major exchanges in order to survive in the penny stock environment. By following a few important steps when you make penny trades, you can ensure that you will avoid the worst possibilities.
As a first step to learning how to play penny stocks, subscribe to a penny stock newsletter or to some kind of alert system. These notices will carry information about penny stocks that you will find hard to unearth elsewhere. These newsletters are not always dependable but sometimes they will tip you off to a stock that is about to break out.
Second, use stop-loss orders on your penny stock investments, no matter how certain that you are of success. Base your stop-loss order on an Average True Range (ATR) that is shorter than you would use for most stocks. This ATR measures the volatility of a stock over a period of time. Three days is the maximum limit of the ATR that you use with penny stocks.
Third, diversify your penny stock investments. Do not put all of your money in gold penny stocks or any single sector of the economy. This makes it less likely that a broad market movement will affect your entire portfolio while you learn how to play penny stocks.
Finally, avoid investing in companies that have been around for less than three years. This may force you to ignore a lot of tips about new companies that are allegedly certain of success. It will also protect you from many failures out there, as you learn how to play penny stocks.
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