Even the gurus of penny stocks trading have those days where they accept their losses and move on to the next stock. You cannot expect to make a profit on every stock you buy, for this reason it’s crucial that you know how to use the stop loss method. What is it exactly? The name already says it all, it’s designed to allow traders, especially penny stocks traders to loss as little as possible if the stock is not having a good day.
One thing you need to know about the stop-loss order is that it’s not available for all penny stocks, especially the OTC-BB ones. For this reason you are strongly advised to trade penny stocks traded on the NASDAQ and on the AMEX if you want to put stop-loss orders.
Why Is Stop-Loss Order Important In Penny Stocks Trading?
We all know how volatile is this market, you can never be too sure of a stock. In order to make money trading penny stocks you will have to minimize your losses as low as you can. Basically, the stop-loss order is just an order to sell your shares if the price goes down to your set stop loss price or below. Your shares will automatically be sold if the price goes to your stop-loss level, no actions would be needed from you.
Where Do Stop-Loss Order Are Placed?
It’s not difficult to find where to place the stop-loss once you know where the support of the stock is located within the chart. For those of you who are new to penny stocks trading, support is the lowest price the stock usually goes down to. For example, let’s say stock XYZ drops in price to $1.50 on several occasion and then bounces right back up, but it never break below that price. This would be the support level for XYZ.
Support levels are the result of strong buying pressures while the selling pressures are weaker. In other words, there are lots of shares being bought but not many shares are being sold. This causes the price of the stock to stop decreasing, thus is called the support level.
Now, when setting a stop-loss order it has to be slightly below the support level because you do not want to set it at the support level and see the price shoot right back up after your shares has been sold. Soon after you take position on a stock you should set up the stop-loss. You will also have to remind yourself to reset the level of your stop loss in the event where the price is going up, to ensure that you make a profit if it plummets.
Changing your stop-loss order as the price of the stock is rising assures you that your profit is locked in. If the prices suddenly descends then you know your shares are sold and profit is made.
Many penny stocks traders prefer to set their stop-loss order at the support level, but I think it is better to be right below the support. You may disagree with me, but it has been working pretty well for me thus far.
Always remember to set up stop-loss order when trading penny stocks. You can hurt your portfolio badly by not taking this advantage. The little time taken for this could save you a lot or make you a lot.