In case you haven’t noticed, I’ve been totally wrapped up lately with my new WolfMillionaire.com guide to growing your following on social media, specifically . I’m really excited about sharing everything I know about making money on the web’s fastest growing social network, but the sad thing is that it’s been taking up so much of my time that I haven’t been able to do as many Q&As and support messages as I like, especially since despite the new project, I’ve kept up trading pretty well in a tricky market, making daily video lessons and giving my weekly live trading/Q&A webinars to my trading challenge students.
Download a checklist of my top penny stock trading tips.
So today, I’m going to give you one of the best pieces of advice I can think of right now. Hopefully, that’ll hold you over until Wolf Millionaire is launched and I can get back to doing what I do best – teaching students how to become penny stock trading millionaires.**
Are you ready to get started? The one piece of wisdom I want to leave you with – the one that’s as responsible for my success as a penny stock trader as anything else – is this:
I know what you’re thinking… “Tim, what the hell, man? How about you give me something I can actually use??” You were probably hoping that my #1 top penny stock trading tip would be something like “Only buy at this risk-reward ratio” or “Only trade stocks that meet this one criteria.” And I can give you that kind of advice too, but believe me when I say that this is way more important.
Here’s the down and dirty truth about penny stock trading: More than 90% of all traders are going to lose money.
Let that sink in for a second…
Now, I could see how it’d be easy to jump to conclusions and say that 90% of people lose money because penny stocks are too risky or because it’s impossible to make a profit with them. But that’s just true. My students and I do just fine trading penny stocks because we’ve learned to embrace this rule about being safe.
So what exactly does it mean to be safe as a penny stock trader? Let’s break things down a bit:
Being safe means researching your picks
Here’s how most people trade penny stocks… They get a “hot tip” from a chat room or message board (or, god forbid, a mailer) and they go all in. After all, those guys wouldn’t call a stock a slam dunk if it wasn’t a good buy, right?
I’m hoping you already see the problems here, but this is exactly why so many penny stock traders lose money.
A chat room update doesn’t tell you anything about a stock. All it tells you is that someone – somewhere – is trying to drive interest in the company. Sure, maybe it’s someone with purely good intentions who just wants everyone to profit, but it’s way more likely that the person feeding you that hot tip is a promoter who’s counting on you to act stupidly.
Now, for comparison, here’s how my students trade…
Sure, we might get tipped off to a good penny stock play through one of those channels, but we’re much more likely to find our setups with some good old-fashioned research. We’re watching earnings winners. We’re monitoring the news to find billionaires that are buying into penny stocks. We’re even digging through SEC filings to predict the kinds of moves penny stock companies might be making in the future.
Penny stock plays are relatively slow moving if you know what to look for. And when you’ve taken the time to educate yourself on the patterns we play, you can better understand how to do the kind of research we use to capitalize on great setups as they’re occurring.
Being safe means having a plan BEFORE risking your hard-earned money
So now, say you’ve done your research. You see a promising opportunity on a penny stock that you think is going to spike or crash soon. Do you just jump in, buy/short sell a few shares and hope for the best?
Of course not.
I’m hoping you’re not dumb enough to think that’s how good trading works, but even if you understand the importance of having a plan, you might not be aware of how thoroughly me and my students map out our trades.
When I’m looking at a possible play, there are a few different things I’m thinking about:
What’s my ideal entry and exit point?
If I’m going to trade a penny stock, I’m aiming for at least a 3-to-1 or a 4-to-1 risk-reward ratio, sometimes there’s even an 8-to-1 or 10-to-1 risk-award ratio. To figure out whether or not that’s possible, I’ll look closely at a stock’s price action to see where support/resistance is, where I’m likely to be able to get in and out, and whether or not those numbers are going to give me the return I’m looking for. Keeping risk low means cutting losses fast if and when the stock starts getting away from me. A risk-reward ratio is meaningless if you ignore your own risk levels and let your losses run as far too many traders, not just in the penny stock space, do far too often and that’s why 90%+ of traders lose…it’s not that the game is so difficult, it’s that they don’t follow the rules and their lack of discipline creates big losses.
For example, my first millionaire trading challenge student and I were both short KBIO THE DAY THE STOCK SPIKED BIG…did we get wiped out like so many other traders did? Nope, we both were disciplined, we cut our losses and lost a few thousand dollars each…money we’ve made back since.**
How will any one position impact my overall portfolio?
Going “all in” looks so glamorous when it’s the poker players doing it in Vegas, but in penny stock trading, it’s just about the stupidest thing you can do. And yet, I’ve seen way too many traders risk everything on a single promising stock.
Let me tell you, that doesn’t make you look like a badass. It makes you look like an idiot.
When I’m making a trade, it’s rare that I’ll put more than 20-40% of my portfolio into a single stock. It’s just not safe for me to risk more than that. What would happen if something went wrong with my trade? Even as a trading teacher who’s made more than $4 million in penny stock profits**, I’m still only right about 74% of the time. And if I can be wrong that often, so can you.
How will my position impact the stock?
This is a bit higher level, but one factor I consider is whether or not the position size I’m planning represents too large of a stake in a stock’s daily trading volume. If my position is too big, I risk not being able to get out when I need to.
Generally, I like to stick to a limit of 5-10% of a stock’s trading volume. It’s just safer that way.
Being safe means cutting your losses
Finally, a big part of your success as a penny stock trader will come down to knowing “when to hold ‘em and when to fold ‘em.” And I’m not talking about poker. I’m talking about knowing when to cut your losses and get out of a trade that’s gone south.
Remember earlier when I said that I only win 74% of the time? That means that, with roughly one out of every four trades I make, I’m having to cut my losses. Rough 26% of the time. It’s not fun, but it’s necessary if I want to be around to trade another day.
The way I determine when to cut my losses comes from the risk-reward ratios I set for myself. Let’s say that, based on my research and a stock’s price action, my goal is to make $1.00 a share on a trade – maybe on a stock that I think will go from $3.00 to $4.00. If I’m aiming for a 4-to-1 risk-reward ratio, I’m going to get out if the stock drops to $2.75 ($0.25 is one quarter of my $1.00 goal).
Of course, knowing my numbers is one thing – actually executing on them can be a lot more difficult. I’m at the point in my career now where I don’t have ego attached to my trades. It doesn’t hurt my feelings if a trade falls apart. There are just too many other opportunities out there for me to do anything but cut my losses and move on.
But it’s taken me a while to get to that point. I know how emotionally tough it can be have to abandon a trade you were really hopeful about. Especially when you’re new, it’s really easy to get wrapped up in the story of a company or to think that you’re smarter than everybody else – that you know better about what a stock’s going to do.
That kind of emotional thinking is the opposite of safe. It’s putting your portfolio at a tremendous amount of risk because you’re no longer dealing with numbers. Emotions and rationalizations can lie to you. Numbers can’t. Adopt “be safe” as your first rule as a trader, and never let your heart sway you from what the numbers are actually telling you.
Being safe as a trader isn’t sexy advice. Safety is boring, especially if you’re comparing it to all the stories you read online about gamblers who win big, successful entrepreneurs who take major risks and all the others “mavericks” who preach action and daring over research and study.
But you know what? If risk taking is your thing, take up race-car driving and sky-diving. If, on the other hand, building generational wealth in just a few short years and giving your family the lifestyle you’ve always dreamed of is your thing like my top students & I have achieved, stick to the safe approach that, even in tricky market conditions, keep your portfolio and your profits over time very healthy.