If you have invested some time into your trading education, you have probably learned a lot about trading rules. Every trader has a set of trading rules that will make or break them. I always hear traders talking about how important it is to never break your trading rules. First things first, I agree with this. Trading requires discipline and you should always stick to your plan. That being said, you need to make sure your trading rules match your trading style. Trading sub-penny stocks is a lot different than trading small/large cap stocks on bigger boards, therefore, you need to adjust your strategy accordingly.
One of the biggest rules most trader’s have is to cut losses quickly. While I agree with this rule for higher priced stocks ($0.50+/share), I have found that following this rule causes me to lose more money in sub-penny stocks. For higher priced penny stocks ($0.50-$5/share), I try to cut losses at 5-10%. These stocks are usually less volatile, so a downward movement of 5-10% indicates that a bad trade was placed and the stock is moving against you. This is a great rule to follow when you want to protect yourself in these types of trade, however, this rule can actually hurt your bottom line with sub penny stocks.
Sub-penny stocks are much more volatile, so 5-10% moves can actually be normal fluctuation, quick dips, or even consolidation. For that reason, I rarely scalp sub-penny stocks. I’ve found that most of the money is in swing trading sub-penny stocks. Therefore, you need to be able to stomach unrealized losses without panicking. After all, you probably got into the stock for a reason. Of course, if the stock is really moving against you, you should cut losses, however, it is important to understand why the stock is moving the way it is. When I enter a swing trade on a sub-penny stock, I have a very specific plan. I usually want to get in when I believe the share price is undervalued and sell when I believe it is overvalued. Often times, I will be waiting for a specific catalyst to trigger my sell order. While I wait, the stock fluctuates a lot.
Here is an example. I was down about $1700 on a MYEC trade before selling the stock later for a profit of about $5100. I bought my shares at .0224/share on March 6, 2014. That same day, the price dropped down to .0194/share. At one point during the day, I was down about 14% or $1700 on my 570,000 shares. Trading rules would have told me to cut my losses way earlier, but my plan was different. I knew the company had some big catalysts approaching so I held. Luckily, my plan played out the way I wanted it to and I made a nice $5100 profit.
I could give plenty of examples as to why you should be using different strategies for sub-penny and cheap penny stocks, but the point is simple. Most traders stay the hell away from sub-penny stocks so there rules do not apply. Stocks under $0.05/share are exceptionally volatile and risky. If you enter them, you need the right strategy. Normal trading rules won’t help too much. Technical indicators are not as effective, support and resistance can be broken down easily, and daily price ranges are much wider than with other stocks. In another post, I talk about how you should never invest what you cannot afford to lose. I’ve lost as much as 90% of my investment on sub-penny trades gone wrong, however, my rationale behind those trades was garbage.
In short, make sure you have solid rationale behind your trades, and keep in mind that you may need to ignore some widely accepted rules in order to come out on top in the long run.