Also figure out what type of trader you are, this goes back to what SL said about "Mastering Yourself" when it comes to trading. It boils down to this, don't daytrade if you're not really comfortable with daytrading just because that's what a lot of folks on I-Hub do. Conversely, don't hold long if you're a daytrader by nature, i.e., your brain starts hemorraging when the pps drops below your entry point.
What Type of Trader Are You?
Before you emerse yourself in the rough and tumble world of penny stock trading (or if you are already deep in it) take a moment to reflect on your trading style and, equally important, whether that trading style fits your personality. It is my position that "mixing and matching" trading styles can only lead to disaster. Someone not suited for daytrading, for example, but who nonetheless daytrades, will inevitably fail. To be a successful penny stock trader, one must be brutally honest with oneself and employ the trading strategy, and stick with it, that suits the trader's personality and goals.
Many traders, wittingly or unwittingly, fall into one of the following category of trader:
Daytrader. The formal definition of a daytrader is simply that they close out their position in a particular stock at the end of the day. Daytraders "play" a stock for minutes, hours or, rarely, a full trading day, with the goal of getting in and getting out with a profit. The daytraders motto is "live to fight another day" or "a profit a day keeps the job away."
Chartist/Technical Analystists. A chartist trades based on technical indicators, with the belief that a chart takes into account all factors that affect, or could affect, a stock. Chartists believe that such things as financials, rumors, news, etc., will be reflected in a chart and, therefore, anything but a chart is deemed unnecessary.
Flipper. A flipper is someone that trades a stock multiple times. There is much overlap between flippers and daytraders, chartists and other types of traders. But generally, while a daytrader will move on to new hunting grounds after selling a position, a flipper will remain with the same stock for a longer period of time.
Short-Term Momo Traders. Much like daytraders, a short term momo trader enters stocks with momentum, but unlike daytraders will stay in the stock for a few days. Often these types of traders will follow the 3-day rule, i.e., a stock will have a good run for 3 days before correcting. A short term momo trader will not ride out dips and shakes in a stock, but rather will exit upon such events.
Long-Term Momo Traders. Long term momomentum traders will stay in a particular stock through peaks and valleys, as long as they believe a stock is in an uptrend. Although "long," such traders are still momentum traders and fundamentalists.
Fundamentalists. Fundamentalists do extensive due diligence (DD) on a particular stock and base their trading decisions on their DD. They will also focus on a company's A/S, O/S and float. This group will ride out peaks and valleys, having "faith" in the company. Generally, penny stock traders of all the other styles described in this article ignore or limit DD when making trading decisions.
Low Float Hunters. This group of trader seeks stocks with low floats, such as shell stocks, and will jump in upon any movement in pps.
Event/News Hunters. This group of trader seeks an impetus to enter a particular stock, such as good news or some other type of potential "triggering" event, such as a short squeeze, buy out, rumors, etc.
Of course, there are other styles of trading, but I believe the majority of traders fall into one or more of the above. Which one suits you?
Often times, I have seen traders enter a stock on momentum, i.e., a stock that is moving up, then immediately start questioning the company. Is the company legitimate? Are the Press Releases trughtful? Can they be verified? If you are even asking such questions, you are a fundamentalist and you should not play momentum stocks in the first place. Fundamentalists will not be satisified in a stock moving strictly on momomentum, even one that is moving up, if the fundamentalist knows or believes that the company is "shady."
If you have a "kill or be killed" attitude and personality, you are most definitely not suited for day trading. People with this type of personality will not be satisfied taking small gains at a time, even if it means their risk is minimized.
If you watch Level 2 incessantly and agonize over each tick up or down, you are a daytrader, flipper or short-term momo trader and you should not be in stocks with good fundamentals, in that you are unwilling to ride the dips and shakes. This is true even for stocks in an uptrend.
The point is, know what you own but equally as important, know yourself and what style of trader you are. It will make you a more successful, and less stressed, trader.
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