Penny stocks, and day trading in general, are attractive because profits can be realized in a short amount of time. Unfortunately, that short-term profit often puts traders into a short-term mindset. And when it comes to money management and goal setting, short term thinking can be devastating.
The very reason for day trading is to make a greater profit than might be possible in any other investment vehicle. And it certainly can be if done correctly. But if the mindset is only for the short-term goal of getting rich quick, then you can be guaranteed, disaster looms ahead.
To truly cash in on penny stocks profits, one must have a longer term outlook. Now, I'm not talking about the time period of a trade. I'm talking about the overall plan and expectations. Not trade-by-trade. Not even week-by-week. But how about developing a life-time system? (Sort of like a developing a life-time mindset of eating healthy as opposed to crash diets.)
Two Aspects of Trading
Let's examine two aspects of trading. The first is when to get in and when to get out of the market. When to pull the trigger, where to set the trailing stops, when to make the exits. To help you in these decisions, there are trading systems, software, newsletters, hot lines, trading reports, and the list goes on. These are all tremendous helps. (See below for some of the better ones available.)
But the second aspect often goes begging - and it is a decision made every time a trade is executed. That decision is: how much of your capital are you going to risk on one trade? This decision often has more to do with your success than knowledge of the market itself.
Your decision of how much you are willing to risk must be made way ahead of the moment you pull the trigger to make your trade.
A Simple Example.
One trader followed the advice of a trading service (perhaps much like Marl, the Stock Trading Robot). For a year this trader made trades according to the advice given. At the end of the year his account reached $27,000. The next year, he pulled in $15,000. He now was in profits for $42,000. Pretty good, right?
Trader number two used the same service. Contrary to trader number one, this trader applied conservative money management principles. His first year netted him $63,000. (If you're slow with math, that is a 233% increase over trader number one.) The second year, he continued in his conservative pattern and brought in $113,000. His total profits added up to $176,000. A whopping 419% more than trader number one.
The third year showed a downturn in the trading service and there was a loss of $15,000. Trader number one wound up with a profit of $27,000 for the three years. Trader number two, however, stood at $102,000 in total profits. Hence trader number one wound up giving back all his profits.
The question is, which trader would you rather be?
What Can Money Management Do For You?
- Keep you from being wiped out.
- Allow you to approach system trading with a plan and the ability to continue trading even if the system fails miserably.
- Increase your profits five- to tenfold (500 percent to 1,000 percent) without increasing your overall risk of the account. (It may even decrease the overall percent at risk in the account.)
- Protect your profits should the system fail you.
There are three vital questions that every trader must ask regarding money management:
- What is the goal of your account?
- What is the total risk you are willing to take to achieve that goal?
- What are the available resources to achieve your goal without violating your risk tolerance levels?
With every penny stock day trader the answers will be different. What is right for you might not be right for your trading buddy.
Understanding money management will allow you apply the principles to your trading to accomplish your goals - without violating your risk tolerance levels.
Three Simple Tips in Money Management:
- Limit Order: Know how to place a limit order when buying stock. No surprises. You buy only at the exact price you specify, usually somewhere between the bid and ask price on your screen.
- Stop-loss market order: Immediately after you buy, place your stop-loss market sell order with your online broker. This 30-second act of typing in symbol, price, shares, and the time period during which you want this order in place will automatically sell your stock later, at the price you have predetermined should the market take a surprise nosedive.
- Sell order: Decide on the price at which you'd like to sell. Don't get greedy. (Greed and fear are the twin killers in trading. Keep greed glands in check at all times.) Keep that number written down on a piece of paper and keep it close at hand. If the stock zooms up further, you can always buy back in for $8 or $10 or $30 commissions. That better than losing your entire investment.
Online day trading is a tremendous opportunity to grow your cash reserves. But please educate yourself along the way. Just as a person can self-educate in the areas of finance and the Internet, you can learn how to safely profit by day trading penny stocks.
In the area of money management ask yourself:
- Are you strong enough to create a plan of action and stick with it?
- Are you strong enough to walk away when winning? (Hint: Emotions are dangerous to your trading health.)
We've all read the statistics that approximately 70% of all traders lose money. Isn't it ironic that in the trading industry, more than 70% of all traders ignore money management. Hmmm. Could it be coincidence?
Only you can determine if this venture is for you. And if it is, be wise enough to include prudent money management into your trading system.
Daytrading Coach - Free 60- minute Coaching Session: Stop stumbling in your day trading. Let seasoned traders (3 of them floor traders) teach you their techniques and systems. Free trial coaching session. Hurry, before you lose another dollar. http://www.dblpennystox.com/rockwell2
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