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Penny Stock Tips – Golden Rules: Protect Your Capital

Posted on March 22, 2009 by Penny Stocks Picker

Golden rule #1:  Protect your capital

Your first priority when trading penny stocks is to always protect your capital (your cash in your trading account).  Your capital is the life blood of your trading account, which is the most important tool you have in order to trade penny stocks.  Once your capital is gone then you no longer can play the penny stock trade game.  It’s good practice to envision that your capital is your own blood in your body.  You can always afford to lose a small amount of blood on a single event (i.e., learning trade), knowing that it will be replaced in time with new blood (winning trades), but if you lose most or all of your blood at once, then you’re dead (your life and trading account is finished).  It’s possible that you could get a transfusion or donation in time to save your life and have a second chance, but I wouldn’t count on it.

How to protect your capital

Here’s just a few things you can do to protect your penny stock capital.
1)  Always take your profits on winning trades when you have them no matter what (see my article in category archives about taking your profits for more details).  A winning trade is a trade that you profit on by having good timing and thus entered and exited the penny stock trade correctly.  You don’t need perfect timing (in at the absolute bottom or out at the top), but you must be disciplined and have a plan to ensure you will take your profits.  Whenever you have a winning hot penny stock trade you need to take that money off the table.  You should add that additional money (new capital) to your account balance.  This new balance is now your new capital basis.  Capital from winning trades is not found money; it is hard earned capital that must be considered as the new starting point of your blood supply if you want your account to grow. 
 
2)  Keep your losses small on all of your learning trades, which are those trades that you are losing money on.  You might have chased a penny stock to the top before you bought, you forgot to take your profit, or you fell in love and bought into the hype (drank the Kool-aid).  You will have learning trades from time to time (I still do).  Just don’t sit there like a deer in the headlight and hope that hot penny stock is going to come back and be profitable at some point (see #3 below).  Treat this as a learning trade and take your small loss before it becomes a bigger one.  Consider this small loss (learning trade) as an educational expense and identify what it is that went wrong so that you can correct it the next time.  What I’m trying to say is, if a penny stock trade doesn’t go as planned, then get out and move on.  You’re not always going to be correct, admit you were wrong and take the loss now before it’s all gone.  You should not have chased and bought a penny stock up at the resistance zone; if you did then it’s probably a learning trade.  It’s best to buy near a support zone to minimize your risk.  However, if it that support level is broken then it’s probably a good idea to take the loss. 

3)  Don’t tie up money on trades that aren’t going anywhere.  This is the basis of my strategy and hence the daily penny stock suggestions that we list.  I’m looking for hot penny stocks on the move that have the best chance of yielding a significant profit within a short period of time (refer to our introduction in the category archives to properly understand how to use our daily suggestions).  The idea here is that we are not watching paint dry, if you want a sure thing over the long term then you’re probably wasting your time watching my hot penny stock suggestions.  The only sure thing about investing long term in any of our penny stock suggestions is that you will more than likely lose money.  So point is, you want to trade penny stocks on the move, not tie up our money when there are other hot penny stock opportunities.  If the penny stock you bought is just sitting there doing nothing then it’s probably a good idea to move on and put your capital to work elsewhere.  Better yet, if you can’t see a reason why that penny stock is going to run, then don’t even buy it.  You can always come back to that penny stock when the momentum returns. 

4)  Don’t go all in.  My general rule is not to use more than 5 to 10% of my capital on any one penny stock trade.

5)  Don’t trade when you’re feeling sick or tired.   You’re going to make bad penny stock trade decisions if you’re not trading with a clear head or well rested.  Take the day off and do something else (like take a nap, read a book…….).

6)  Don’t expect to always be correct. (See #2 above)

7)  If you don’t have a valid reason to make the trade, then don’t do it (See #3 above).  You should have some valid reason why you believe the penny stock is going to run or will continue to run up.   Don’t just act because someone told you to, you should do your own homework and come to your own conclusion.

8 )  Have a plan and stick to it.

Golden rule #2:  Refer to rule #1 above