This week's lesson.
Today I want to focus on the ideal capital needed to start trading penny stocks.
If you’re starting out, it’s beneficial to do research and get a general idea of what penny stocks are because being prepared will save you time and money.
FOR YOUR PREPARATION
And as far as money is concerned, you need to save as much as possible. People who go into the industry with less than $1,000 are doing so blindly, which won’t work in their favor. Without having technical or fundamental analysis, you’re looking at worse odds than a casino, and most of the time, you’ll lose all of your capital.
In order to avoid this, I spent a massive amount of time looking into mentors or gurus so I could better understand the strategy behind the market. By allowing a 6-12 month trial run, you can begin to get the trading rhythm by deep-diving into statistics that let you see the highest winning percentage of a pattern and go from there.
When it comes to the capital needed to start trading, I recommend a minimum of $20,000…
…because you need to assume that half of that money will go into learning the market. To grasp the technical and fundamental analysis, you’ll spend that money on watching live traders or subscribing to other services they have to boost your knowledge. And once you do, you’ll learn the market much quicker. One thing you’ll find through this research is how emotional trading can get, which leads to a loss of control and your account. There’s a whole community in this industry that you can lean on and learn from; you just have to navigate it.
MINIMUM & MAXIMUM
As you have a minimum amount needed for your account, also have a maximum.
I suggest having a $200-$300,000 cap on your account and not use more than that in capital in one trade. The world of penny stocks is much smaller than futures or options because the more you size in, the more you affect the market. We see this especially on low float stocks because you can easily get blown out when the stock starts to go in the opposite direction than expected. You’ll quickly be cutting your losses, and that spread will make a critical difference. The best way to figure out the maximum size of a trade to make correlates with the volume.