Rules of Penny Stock Trading

by Rob rens - Date: 2007-01-26 - Word Count: 428 Share This!

For all you penny stock traders out there or anyone interested in learning some basics rules to trading. I have put together some rules that I follow when penny stock trading.

1. Never, ever, ever add to a losing position: To do so will eventually and absolutely lead to ruin. Remember Long Term Capital Management and its legion of Nobel laureates who broke this rule repeatedly and went into forced liquidation. Learn this lesson... well and early!

2. Capital comes in two varieties: Mental capital, and that which is in your account: Of the two, mental capital is the more important. Holding losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

3. The objective is not to buy low and sell high, but to buy high and to sell higher: We can never know what price is "low." Nor can we know what price is "high." Always remember that Nortel fell from $85/share to $2 and seemed "cheap" all times along the way.

4. "Markets can remain illogical longer than you or I can remain solvent," is a brilliant statement from our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are inefficient despite what the academics try to tell us.

5. Sell that which shows the greatest weakness, and buy that which shows the greatest strength: Metaphorically, when bearish, throw rocks into the wettest paper sack, for they break most readily. In bull markets, ride the strongest winds.

6. Think like a fundamentalist; trade like a technician: It is imperative that we understand the fundamentals driving a trade, and that we understand the market's technicals also. When we do, then, and only then, should we trade.

7. Understanding psychology is usually more important than understanding economics: Markets are driven by human beings making human errors... and also making super-human insights.

8. Be patient with winning trades; be enormously impatient with losing trades: Remember, it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.

9. The Hard Trade is the Right Trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this 25 years ago and it holds truer now than then.

10. There is never one cockroach: Bad news begets bad news, which begets even worse news

Rob is the owner of Penny Stock Picks, and stock message board

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