You found your golden stocks and decided to invest with a certain strategy in mind. Now you need a trading strategy to maximize your profits. It's easy to buy a stock at a low price, but as the stock rises to higher levels you may find yourself in a stalemate. No one wants to buy, and you may see your stock fall down from a profit position to a severe loss. Your trading strategy will determine when to buy and sell your stock to minimize the danger of this happening.
Buying Stock
The rule of a thumb is: "The price you see is the price." This price possibly reflects the stock price adequately and, if you expect it to go up, it most likely will. If other traders already found interest in the stock, the price might start moving fast.
Buy when charts dip and sell when they peak. A good stock always looks ominous right before it rebounds. Emotions are low and silly money chases the peaks while selling in the dips. Good traders live on the silly money that lost its nerve.
Buy into weakness and sell into strength. A stock never rises straight up but grows gradually with dips and peaks. In an effort to buy a stock, traders sometimes chase it. The chase rapidly raises the stock price. Don't follow the chase. Even if you find the stock perfect and you want it bad, that emotion may cost you money because the chasing orders will eventually fill, the buying pressure will drop and the stock price will follow into the dip. Many good runs occur daily, so don't worry about missing a big one. Another day lurks around the corner. Stick with your entry price and let the price come to you.
If you invest a part of your funds in one company and the stock drops, you may accept the loss and sell your shares. But if you believe the stock will rebound even higher, you may buy more shares at this lower price. Traders call this averaging down. Averaging down reduces your overall cost per share on your investment. If the price returns to the level of your first buy, you already earned money. Averaging down can help you out of some potholes in the road, but, if things look bad, sell and look for a new trade. However, with limited funds, multiple buys will raise your trading commissions and may cost you a substantial part of your profits. You may not have a choice but to stick with a one-time bulk buy.
Selling Stock
Once you own the shares, your money can turn into plain sheets of paper at any time. So the more briefly you own them, the lower the risk. The price also needs to rise high enough to cover your commissions. Assuming a commission of $10 per trade, to recover your buy and sell commissions on a $500 investment, the share price needs to rise at least 4%. That's easy with penny stocks. With a smaller investment, you need the stock to rise higher. That may mean holding the stock longer, which increases your risks.
Any profit is a profit. If the price has risen 20% since you purchased the stock, it's probably wise to sell. On a $500 investment, 20% leaves you with $80 in profit (including commission) and a feeling of a deserved victory. Letting the stock run higher may tempt you, but it also puts your investment at risk. Watching the profits and investment disappear isn't the most inspiring experience.
You may find yourself in a strong stock and turning larger profits. A smart trader should start looking to exit around the 50% gain mark. You may miss on further potential profits, but don't let your money ride your greed. You'll find it easy to sell shares on the rise, and impossible once a stock plummets. If all the investors in the company's pot want to sell, who will buy? To stay ahead of the dropping market, you may place your order below the bid and be the first one in line when the bid drops to your ask level.
Selling Strategy
Once you decide to sell, the "sell all" strategy always works. Penny stocks move incredibly fast and liquidating your stock asset and turning it into cash can't harm you because, apart from a volatile stock, cash won't disappear. Once you sell your stock, you may reevaluate and decide to buy the same stock at a lower price or just move on.
On the other hand, you may decide to ride free shares. If the stock rises and you can sell a part to recover your initial investment and leave enough free shares in the stock, you may wait and see what happens. If your analysis shows that your stock still has steam, riding free shares can earn you some extra cash. But don't keep the stock just because someone on a message board thinks it's a good idea. If you're not certain, sell and move on.
If you invested long-term or own a large position in the stock, you'll want to scale out and sell parts of your shares at different price levels. If the price slowly rises and it appears that the trend will continue, selling in small batches will be easier than selling in bulk at once. And in relation to the trading volume, selling a bulk may stall the stock, or even cause a decline, before all of your shares sell. You shouldn't encounter any problems when buying or selling $500 worth of shares unless you made a mistake and invested in a thinly traded penny stock.
Use charts to determine market entry and exit points. These visual aids can help you spot trends, determine support and resistance levels, and predict a stock's price movement.
Cutting Losses
Investors don't earn money on each stock they invest in. Even if you've done your homework, the "golden stock" can still surprise you. If things don't look good, cut your loss and move on. Some people will let the price drop 10%, while others will go to 20%. Set your limit and determine how much you can afford to jeopardize. By cutting your losses early, you reduce your risk and secure your money for the next trade.
