There are different criteria to consider a stock to penny stock. In US market a stock called penny stock if its trade below $10, which is equal to approximate Rs.670 in Indian currency. In the Indian market, most of the stocks are trading below 670 levels so we cannot follow this level. I consider a stock to a penny stock if its price is below Rs. 30.
So when trade a penny stock just follow these eight simple rules.
Unlike big stocks, penny stocks are more prone to manipulation. And, given that most of us buy merely on word-of-mouth recommendations, the job of unscrupulous dealers become quite simple.
Do not get carried away by hyped-up media reports through SMS, newspapers, television shows, newsletters etc. You must do your own research. I repeat, do not believe on any tips; especially with regards to penny stocks.
#Rule No.2: Fundamentally strong
This is the very important rule. A penny stock, which you are going to choose must fundamentally strong. If your selected penny stock doesn’t follow this rule, then drop it, No need to look further. I recommended buying penny stocks when they have good earnings, constant growth and stable business.
#Rule No.3: History of the Trading Volume
Let’s say you are sitting on 100% profits. But when you go to sell, you may not find any buyers. If you trade stocks with low volume, it could be difficult to get out of your position. Low volume stocks can be manipulated or trading by operators.
Penny stocks are normally illiquid. A large part of the shareholding is owned by the promoters who may readily be willing to be sellers. But when it comes to buyers, you won’t find many of them. So choose only those stocks, who have constant high trading volume (at least more than 50,000 per day) in last 6-8 months.
#Rule No.4: Avoid stocks those has Upper & Lower circuit history
Just check the historical chart of penny stocks that they have any Upper or especially lower circuit history or not. If they have any lower circuit history then avoid those stocks. As it’s manipulated by operators. So when they will exit from stock, it will start to hit the lower circuit and you cannot exit from stock and it will become a nightmare for you.
#Rule No.5: Buy at Technical Breakout
Buy penny stocks only when they are breaking out to 52-week highs, or moving average crossover (like 200DMA, 150DMA) with higher volume. Most of the time penny stocks are trading in a narrow range, so when they break this range, then they can give easily 20-30% move within 3-30 days.
#Rule No.6: Trade only small position
You really need to be careful with position sizing. If a penny stock can rise 20-30% within few days then it can be fall more than 50% also in no time and you can trap in it. So, do not invest more than 3-5% of your capital in penny stocks. Anything above 5% is risky.
#Rule No.7: Use Stop loss and Trail stop loss
You must use stop loss when you are trading penny stocks. You can’t avoid stop loss in this hope that stock will back to the previous price. Sometimes penny stocks take many years to back the previous price or sometimes they never back to the previous price even they fall badly. So you must cut your losses before it turns into your nightmare.
You must use 1:4 or 1:3 risk reward as your stop loss that means if you want to take 10 rupees profit then you stop loss should be 3 rupees. You should use the trailing stop loss to maximize your profits.
You must use a mental stop loss because the bid-ask spreads on many penny stocks can be high, as much as 10%, hard stop-losses can actually cause you to lose money.
#Rule No.8: Book 20-30% profit
One allure of penny stocks is you can make 20% or 30% in a few days. If you make that kind of return with a penny stock, sell quickly. You can’t trust on penny stocks so book profits and move on. Unfortunately, many traders get greedy, aiming for a 1,000% return and trapped. Do not try to find multi-baggers in penny stocks. The multi-bagger idea is based on lower valuation, not on lower price.
