The Importance of Setting Specific Guidelines Before Watching for Penny Stocks to Buy

Devising a short list of personal rules before getting started in penny stock trading is advantageous for keeping the trader in line, so to speak. It eliminates second-guessing, emotional trading and bad spontaneous decision making. This type of list can be built from guidelines offered by successful penny stock traders, and it should incorporate some individualized insight as well. Now, when this person looks for penny stocks to buy, there are definitive factors that must be met before a purchase is made.

An example of an important guideline is to be wary of penny stock recommendations unless the trader has made certain the recommendation comes from someone who is well-respected in the trading field. Penny stocks tend to trade on low volume, making it relatively easy for someone with a good deal of cash and trading know-how to profit from other people’s ignorance. A common scheme is known as the pump-and-dump. In this scheme, a seasoned trader buys into a certain security, announces an expected skyrocket of the price, and waits as people take that advice and buy the stock. The price is driven higher by this activity. The person who made this original announcement then dumps the stock for a profit and the price plummets, leaving the other traders lucky if they manage to break even.

The problem with the low-volume trading in this type of scheme is that it can be difficult to unload a stock. There may not be anyone who wants to buy it. Now the novice trader is stuck with this stock until the volume picks up again. This scheme isn’t particular to penny stocks, either. It can happen in higher-priced securities as well.

Anyone who is thinking about trading full-time needs guidelines involving healthy activity. Sitting at a computer all day is tiring. There should be several short breaks during the trading day that include standing up and walking around. The person should have filled the kitchen with healthy food beforehand. Living on coffee, donuts and potato chips is not conducive to the clear mind needed for evaluating lists of possibilities, analyzing charts and watching minute-by-minute price movements.

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