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Implementing A System For Trading Penny Stocks

Mar 6, 2008
There are many penny stock trading rules that should be considered before venturing into the penny stock trading arena in order to avoid loss of trading capital.

The most important of these rules is only trading penny stocks with funds that will not hurt you financially. It cannot be stressed enough that emotion plays a very large part of the decision making process when trading. Emotion is the number one factor that creates losses when trading.

Hardcore veteran daytraders spend years implementing a trading system that removes emotion from the trading process, knowing all too well how emotion can affect the decision making process when deciding entry and exit points when placing trades.

This is why so much emphasis is placed on trading only with money that can be afforded to be lost without causing financial distress. If the the trader only uses expendable capital for trading, it reduces the amount of emotion involved, therefore removing irrational decision making in trading.

There is talk among traders as to how much of your trading capital should be used for each individual trade. Many traders believe that one percent of total trading capital should be used for each individual trade with others saying five percent or more. Usually this is a question that should be answered by the trader himself with five percent of total capital being the maximum amount used for individual trades.

One aspect of trading that many potential traders show little concern for, is developing a trading system that works for them that is designed for their style and risk tolerance. Developing a system can require many hours and days of testing and retesting, but with the proper amount of research and testing, a system can be designed that will make the trader both successful and profitable.

The major reason for success when a trading system is developed, is the fact that the system is entirely mechanical and removes emotion from the equation. Risk management being key when developing a successful trading system.

There are many different charts and indicators that can be used for a trading system but simplicity has always been the hallmark of successful trading systems. Finding two or three indicators along with the chart style of choice is usually all that it is needed.

Overloading a chart with too many indicators will not only confuse the trader, but can also produce conflicting data since all indicators use different calculations and formulas. Simplicity can not be emphasised enough when keeping indicators at a minimum in a trading system.

Penny stock trading is not for people with scared money or little experience in the stock market. Penny stock trading requires experience and knowledge of the small cap markets. Huge gains can be made in penny stocks but more times than not, money is lost by people willing to gamble and not learn to trade the penny stock market.

Greed is a powerful motivator and is a a human emotion. As stated above, emotion has no place in a traders plan for success, Hope and greed have destroyed more brokerage accounts than any downturn in the market. Every year more and more people open online brokerage accounts with hopes of hitting the proverbial home run, only to walk away with empty brokerage accounts and disillusionment.

Developing a trading system that works can only be found by hard and dedicated work by the trader with the discipline to adhere to the rules implemented. Not unlike the airplane pilot who learns to trust his instruments rather than what his head is telling him, in the end possibly saving his life. Just as a successful trading system can save a traders financial life to live another day.
About the Author
Phillip Hatley has been trading penny stocks for 8 years. For more information about trading penny stocks, please visit his blog.
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