A Simple Approach To Position Sizing and Money Management Trading Penny Stocks

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 on how to go about building your account and day trading stocks.

Set Realistic Goals

 

The Mind Set Trading Penny Stocks

Think of the money deposited in your trading account to be already gone. It’s money that you can afford to lose…money that you don’t need to survive, pay the bills…it’s your 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 opportunities. 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. As a trader, you want to always try to be in control, avoid making desperate trades and gambling.

position sizing

Bankroll

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 you risk $250. A $250 trade is equivalent to 5% of your entire account size. In addition, it would take 20 straight losses for you to go bust. Although it doesn’t seem too bad, it would probably make more sense to reduce that risk to say $100 per trade.

If you followed that rule, you’d be looking at risking 2% of your account size on a single trade. With that said, it would require you to lose 50 straight trades before you blew out your account.

Have control over your trade

By trading this way…you don’t allow one trade to damage your account. Not only that, but it allows you to collect stats on your trading operation. The more data collected, the better you’ll understand your strengths and weaknesses. Some traders lose all their money on one or two trades, and the only thing they learn is not to put all their eggs in one basket.

By staying in the game, you’ll gain valuable screen time experience and make the best of free stock trading.

Again, by trading 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.

money management nasdaq stocks

Building Your Stack While Trading Penny Stocks

As your account size grows, so should the size of your trades. For example, let’s you took account from $5,000 to $6000 in four months. The size of a single loss can then be bumped to $120….so on and so forth. 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 about it as well.Only then can act on what stocks to buy.

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