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8 Mistakes novice traders make when getting into penny stocks

Over the course of the last 12 months, I’ve been devoting a major part of my time to learning all the intricacies of penny stocks and working on penny stock related projects. I’ve made my journey to becoming a penny stocking millionaire a serious one.

Throughout this journey I’ve also had the opportunity to spend time around other novice traders as well as experienced ones in order to gather knowledge and develop my trading experience.

As a result of my extensive learning process and constant exposure to novice traders like myself, I’ve become more and more aware of the common mistakes that plague traders in the realm of penny stocks when starting out.

Mistake #1: Let’s start trading right away!

The first common mistake of novice traders is the urge to start trading and seeing all those dollars magically appearing into their accounts. It is quite easy to see the results of successful traders such as Timothy Sykes or Tim Grittani as common practice; it is not uncommon for each of their trades making $3000-$4000.

What novice traders tend to forget, is that the most successful traders have spent a massive amount of time learning and gaining experience throughout the years in order to make each of their trades seem like anyone can do it when an opportunity appears. This is definitely not the case.

Novice traders should really take the time to learn how penny stocks and their environment works before actually attempting to trade. Trading without the proper knowledge and experience is like entering the a martial arts sparring contest without training: you may be able to land a lucky punch, but ultimately your opponent will beat you down without mercy.

If you have the chance to obtain good learning material, I strongly advise you to do so. Timothy Sykes’ DVDs and newsletters are a good choice if you’re willing to spend the time to learn; Here are some of good picks to get started:

The money you spend on the learning material may well save you from taking lots of losses if you don’t know what you’re doing and you decide to get into penny stocks.

If you have good learning material, learn it well, and gain experience progressively before you start committing large chunks of your trading capital to the market.

Mistake #2: No, really, I want to trade!

Trading for the sake of it is going to end up costing you money in terms of losses. Novice traders have a tendency to want action… all the time. In reality trading penny stocks requires patience for the right opportunities to present themselves.

Often times, there are simply no opportunities in the market, yet novice traders just want to send that order and make that trade regardless. This is often referred as Boredom plays or Forced trades.

These types of trades may give you a lucky shot, but ultimately will lead you to loose money in a market that presents no opportunity.

Joshua: Greetings, Professor Falken.

Stephen Falken: Hello, Joshua.

Joshua: A strange game. The only winning move is not to play. How about a nice game of chess?” ~ War Games

Mistake #3: I want to make money now!

Many individuals fall into the Hollywood depiction of the stock market. Individuals making truckloads of money in a matter in mere moments out of seemingly small investments.

The truth of the matter is that such individuals exist, but they have knowledge and experience; novice traders expect their venture into penny stocks to be just like that only to be unpleasantly surprised by a successive streak of losses util the point their account is blown.

If you believe that you can make money from trading penny stocks from the moment you start, you should probably consider other avenues for income. Every beginner trader may be touched by lucky shots and make a couple of hundreds or thousands, however, the reality is that penny stock trading requires a lot of dedication, a lot of learning and just as much experience to turn consistent profits.

The most successful penny stock traders only achieved a sustainable profitability level after 6 months to a year of active day to day trading, which is filled with their share of losses or near account blowouts.

Penny stocks is not for the faint of heart and penny stocks is not something that will make you reach overnight. Trading penny stocks requires strong dedication to developing the skill of recognizing patterns and adapting to the market as it evolves.

Mistake #4: I’ll just follow the picks!

About everyone out there is offering stock picks: gurus, furus, analysts, TV networks; take your pick. Many novice traders choose to follow these picks blindly expecting all the work to be done for them; they are fixated on the idea that they’ll pull the trigger on every pick that is thrown at them and expect to turn a profit from it.

The fact is that in most cases, expert picks are delayed by minutes, which makes a proper profitable entry unlikely.

While it is important for novice traders to learn from expert picks in order to understand the selection and entry/exit process, the goal should be that of developing a self-reliance mindset.

Without being self-reliant, as a trader you’ll always be depending on everyone else to provide you with opportunities and ultimately limit your profit potential to the lowest possible level; in fact, expert picks will become detrimental to your trading in the long run.

“Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime”

Learn how to fish.

Mistake #5: I can trade whenever I want!

Another common misconception that recurs in novice traders is the idea that they can get up in the morning and decide to trade. While it is possible to “wing” trades, penny stock trading does require preparation.

The most successful traders are known to prepare watchlists on a daily basis stating how and why they are watching a stock. Going into a trade without being prepared implies that the trader only has access to the current information about the stock with no context or plan.

It is important for traders to have a trading plan for each trade prepared in advance in order to account for all possibilities in terms of possible actions to take based on price behavior. Many novice traders will simply rely on their gut feeling to enter or exit, and while this may prove successful at times in some rare instances, it can also lead to significant losses or blowing accounts.

As a trader, you must be prepared, know why you are watching a stock, know when you should enter, and more importantly, always know what your exit point should be.

Mistake #6: I can trade in my spare time, you know, like a hobby!

Many traders that start out treat penny stocking as a hobby, a side income “fun” activity; this can often be associated with the common beginner urge to trade all the time. Unfortunately, the reality of penny stocks is that if you treat them like a hobby you’ll get mediocre results.

Penny stocks can become a job on its own, and as such it requires the professionalism that is associated with any career. The only difference is that penny stocking will not fire you; instead, you’ll be blowing your account by giving away your money to the market.

Penny stocking is a serious business, and while it is a money “game” it deserves the respect that any hard working job requires in order to be successful.

That being said, successful penny stocking can be achieved by trading part time (you can look up Tim C. Bohen as a good example of a successful part time trader), but it must be taken just as seriously.

Penny stocks is not a hobby, it is intended to generate income, just like any other job; the only difference is that the profits you earn will be based on knowledge, experience and skill rather than the time you spend trading.

Mistake #7: I’ll stay in this position, it’ll come back!

While this mistake seems like common sense, it is the direct result of an emotional response. Many novice traders are simply unable to cut losses and yet being able to cut losses quickly is one of the most important traits to have as a penny stock trader.

This goes back to the idea of being prepared at all times in order to know what to do when various price behaviors present themselves. Lacking preparation will force novice traders to remain on a trade with the expectation or a recovery, because taking losses is simply unacceptable.

In reality, even successful traders take losses, about 30% of the time; what separates them from the rest is their ability to quickly get out of a position; this requires preparation, knowledge and experience.

In order to stay safe, a trader must have a hypothesis that indicates the expected price behavior of a stock; when those requirements are no longer met, it is usually a good idea to exit a position.

Mistake #8: I can recover those losses! I CAN!

Nobody likes losses. It’s human nature to not like losses. When losses occur, it is a natural reaction to attempt recovering the losses just incurred. Novice traders often fall prey to this temptation and end up taking additional losses.

As mentioned previously, every trader loses money. Trying to recover a loss is a costly mistake, because, much like not cutting losses quickly, it stems from an emotional response associated with stress and dissatisfaction. In order to compensate, novice traders will start chasing the same stock as a sort of “revenge”; needless to say that it seldom ends well.

“Revenge” plays should be avoided at all costs; in fact losses should completely be forgotten in terms of lost revenue and the only thing that should remain is the lesson that such a loss can offer: what went wrong? how could it have been avoided? What other possibilities where there?

It’s important for novice traders to take these facts into consideration when dealing with a loss.