Do you want to make lots of money trading penny stocks in the shortest amount of time possible? Of course you do…I mean who wouldn’t? Everyone wants to take a little bit of money and make it into something substantial.
Now, there is nothing wrong with having lofty goals. In fact, setting goals for ourselves is a great way to stay focused and motivated. However, you’ve got to be realistic…and you’ve got to be smart about building up your trading account.
The Mind Set When Trading Penny Stocks
Think of the money you deposit in your account as it’s already gone. This is money that you can afford to lose…money that you don’t need to survive, pay the bills…it’s your fun money or play money. If you flushed this money down the toilet…it would cause no damage to your lifestyle.
Why is this so important?
Well, we want to stay focused on our trading. What I mean by that is we want to focus on the opportunities the markets give us. Not fixated on money…or the stress of having to perform. When we are stressed about making money, we might force trades that aren’t good opportunities.
You always want to be in control and focused on the trading penny stocks opportunities in front of you…without the pressure of trying to make something happen.
Sorry folks, but that’s the way it is.
Bankroll – Trading Penny Stocks
Second, you’ve got to put yourself in a position to be successful. How do you achieve that? It’s simple really. When you start you’ll need to give yourself margin for error. After all, not every trade is going to be a winner…you might have several losses in a row…you’ll need to have enough capital in your account to absorb losses.
Let’s say you open an account for $5,000 and the maximum risk per trade is $250. A $250 loss is equivalent to 5% of your entire account size. In addition, it would take 20 straight losses for you to go bust.
Ideally, you don’t want to risk more than 2% of your account size on one trade. By trading this way…you don’t allow one trade to damage your account. If you believe you have a strategy that provides an edge…you’ll know that you will come out on top more times than not. However, in the beginning you’re trying to find your edge. You’ll be prone to making a lot of mistakes, so even risking less per trade is not an awful idea in the beginning.
Again, by trading penny stocks in this fashion you know that there is not one single day that will break your account. Also, it helps you focus on the bigger picture and getting out of the gambler’s mentality. It’s important to keep your eyes on the process of trading…making money is the end result of having a successful process. Always put your process first and the money will eventually start pouring in.
Building Your Stack – Trading Penny Stocks
As your account size grows, so should the size of your trades. For example, let’s say you took your account from $5,000 to $6,000 in six months. You should be increasing your share size, while still keeping relative risk at the same percentage. You see, by compounding your gains…you’ll eventually get to a point where you are trading some serious size.
When a junior trader joins a firm, they are first given a demo account to trade. After they become comfortable with the trading platform and their strategy…they are then given a live money account to trade. During that period, they are monitored to make sure they don’t violate their risk limits. If they succeed, they are able to move up and trade bigger.
This is the natural process. Of course, everyone wants to make money quickly…but you’ve got to be realistic if you want to take this seriously… and give yourself a real chance of making big money trading penny stocks.