The First Deadly Sin Of The Penny Stock Trader: Greed
By Ultimate Trading
How Can The Average Penny Stock Trader Avoid Potential Disaster?
In the markets, greed is often a good thing. It is what drives a
stock trader to perform well, and what drives much of the
markets movement. Its the effort that a penny stock trader expend
trying to make a profit that creates the market movement that
enables you, as a penny stock trader, to succeed.
The desire to make money is what motivates every penny stock trader
to become successful. But the desire to succeed is different from
the desire to get every bit of possible profit from a trade. This
kind of reckless greed makes the penny stock trader hold on to their
positions long after the downside has started to outweigh the
upside, until risk outweighs potential reward.
Here's an example: a penny stock trader sees that a particular stock
is starting on a run; it's reported good news and is already up 20%
for the day. The volume is still building; it's stable at the
current price; the market is rallying strongly; and it looks like it
will go higher. The penny stock trader buys 1,000 shares at $6 a
share. By 12:15 P.M., the stock has raced up to $10 - a gain of over
66% for the day, and a profit of $4,000 on 1,000 shares.
This penny stock trader knows that round number price points, like
$10, are psychological barriers for the penny stock trader and that
if a stock is going to stop rising, it will probably be near a point
like this. As it turns out, after momentarily shooting to $10.03,
the price stops rising and starts to go down. The penny stock trader
also knows that he should sell now and re-buy later. But instead of
acting wisely, he keeps thinking, What if it goes to $12 before it
stops? What if it makes a 100% gain? How will I ever forgive myself
for missing out on another $2,000 profit because I sold too soon?
His greed conquers his trading experience.
Of course, what ends up happening to the penny stock trader is that
the stock drops down to $9.50 and then $8.75, ending the day at
$8.90. The next day the market opens down and the penny stock trader
is lucky to get out at $8.70, down $1,300 from the profit he could
The way to get around the lure of excessive greed is to take profits
consistently. It doesn't matter if the stock goes up another dollar
or two after you're out of the position. The important thing is that
you've made a clean profit and are ready to go on to the next trade
with even more capital than you had before. And going on to the next
trade is better than staying in the old one once it's gotten too
risky, because the next trade will have an upside that outweighs the
downside. The old trade's downside has begun to outweigh any further
gains the penny stock trader is likely to make.
penny stock trader locks in profits, he may miss a few highs,
but hell stay consistently ahead. Its better to be consistently
profitable than to risk losing what you have already gained. Its
also wise to consider setting your goals for solid gains, not for
the maximum possible gains. Aiming always for the most possible
profit for a trade locks you into a greedy mindset that will
hinder your success as a penny stock trader in the long run.
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