Before beginning to trade penny stocks you need to spend time educating yourself. After all, you do not invest your money simply for the experience. You invest to make money. There are things that you will need to learn so that you end up making thousands of dollars rather than losing thousands of dollars.
Pick The Right Stock Broker
Now this is fairly simple to do. There are really only two things that you need to keep in mind. The first is that you do not want to use a full service broker. The cost of the commissions will eat into your profit too much. The only reason to ever choose a full service broker is if you plan on relying on the stock picks of a broker. Most full service brokerages do not want their financial consultants suggesting that their clients buy penny stocks. So for all intents they are not the right choice for a penny stock broker.
The second thing that you will want to keep in mind is if you plan on shorting penny shares. There are certain brokerages that are better at obtaining shares to short. Penny stock whizzkid broker is Think or Swim, Interactive Brokers, Sago Trading and Zecco. If you do not plan on short selling companies then any discount brokerage where your commissions are $8 or less would be a good choice.
Practice Diversification at the Start of Trading
I am not a big fan of diversification. I prefer to manage only a few stock picks at a time and watch them closely. With the being said, I would recommend that the beginning penny stock trader practice diversification. Until you have learned to trade and have honed your craft you will not want to put large chunks of your trading capital on an individual trade. Until you have learned to control the emotions of fear and greed you are putting yourself at risk. I would recommend never committing more than 10% of your trading capital to any one trade when you are new to trading. Once you are more comfortable with what you are doing and have shown the ability to cut losers before they become a drag on your account you can consider increasing the amount that you commit to any one trade.
Do Your Own Research
What I really mean here is to not only do your own research but also to make your own trading decisions. Do not lean on stock picking services or newsletters. You have the ability to make your own trading decisions. I make most of my trading decisions based on technical factors. I perform fundamental analysis only to assure myself that I am not stepping into a company that is going to go belly up anytime soon. I am usually not interested in the long term viability of a company. I am a day trader and have a short time horizon. In fact, if you are using a strategy that shorts penny stocks then you might want to attempt to find companies that do have fundamental problems and short them whenever they get a spike in price. Micro cap traders such as Tim Sykes has made a nice living doing this for years.
Adopt a Strategy to Suit Your Style
Most successful traders use a particular strategy that they feel comfortable with. There are some traders that “trade from the gut” but most only lose money that way. If you pressed those that claim to “trade from the gut” you will find that somewhere in their mind is a set of criteria that they are looking for. That, in essence, is their system. You need to know what will cause you to enter a trade. Is it a technical indicator, a breakout, a divergence between indicators, a result of your penny share research, etc. How much profit are you looking for on each trade? Where will you exit the stock if it moves against you? Will you enter full positions or partial positions? How much will you commit to each individual trade? There are many questions to answer. Sit down before beginning and lay out a specific attack plan and then execute it religiously