5 Things to Know Before You Start Working from Home to Trade Penny Stocks

It can be tempting to quit your day job and start working from home trading penny stocks when you read headlines where a trader turns $1,500 to $1 million in 3 years. For most people, that level of success with penny stocks is out of reach. This headline might as well have been about a lottery winner announcement, because the trader in that news story had the same odds of success. For every headline like the one above, there are thousands of untold "Man gambles his life's savings on penny stocks and loses $1 million" stories that wreck lives and ruin families.

Ignore All the Success Stories

The article linked above makes a tempting case for quitting your traditional job and setting up shop as a penny stock day trader on the market. The reality is that penny stocks are worth such a small amount for an excellent reason. Without due diligence and proper research, you will throw good money after bad repeatedly. Most people approach penny stock trading like buying a lotto ticket and just like with lotto tickets, they lose money over and over again hoping to strike it big.

Don't Fall for those Penny Stock Tips & Newsletters

Penny stocks are more often sold than they are bought. That's important enough that it bears repeating. A cursory search on Google will return thousands of penny stocks tips newsletters and email lists, promising to get you in on the ground floor of new penny stocks to trade. The reality of these emails and newsletters is that people who run them are getting paid by these penny stock companies to promote their stock as a hot new option to trade. It's an advertisement for barely established companies, thinly veiled as a hot tip for beginner investors wanting to get started with penny stocks.

Focus on Penny Stocks that Move High Volumes

Beginner traders often make the mistake of getting into low volume stocks that can make it difficult to get out of your position in time to react to the market. For trading newbies, you should stick to trading penny stocks that see at least 100K shares a day traded. Professional traders will tell you that any stock worth less than $.50 a share is not liquid enough to be something you can trade on a daily basis.

Limit Position Sizes to Prevent Massive Losses

It can be tempting to enter a large position while penny stock trading, but this makes it harder to exit when the market swings. A good rule of thumb is not to trade more than 10% of the stock's daily volume. Otherwise, you might struggle to find buyers when you're ready to exit your position.

Never Fall in Love with a Penny Stock.

You shouldn't approach penny stocks with any favoritism in mind, no matter your trading approach. Do your research and diversify your holdings, but also be ready to move out of any stock at a moment’s notice. Don't fall victim to the favoritism game and keep stock because you like the story behind the company. Most of all, be able to keep your emotions out of your trades when dealing with penny stocks since they're so volatile anyway.

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