Cut Losses Early in Penny Stocks, and Let Gains Run

In Penny Stocks, Cut Losses Early, and Let Gains Run

Woman Looking at Stock Market Pages
Woman looking at stock market paper. Cato Park

This is not intended as trading advice.  With low-priced shares, you may be surprised to see how significantly and quickly they can move.  Fortunes can be made in hours, or they can be lost just as quickly.

If you want to play the penny stocks game (no hard feelings if you don't - these tiny shares aren't for everyone), you will enjoy the greatest successes if you follow two strict trading tactics.

 Specifically, cut your losses early, and let your gains run.

Before we get to the good part (and the reason we're all here, which is the rapid gains penny stocks can enjoy), we need to discuss the dark side of speculative, volatile shares.  The losses.  Let's get the ugly part out of the way right now.

Cut Your Losses Early:

If you trade penny stocks with any regularity, you will have shares which drop in value.  The better you are at picking your investments, the better your results will be, but you will still experience losses. 

Most penny stock investors will go down with the ship before they'd give up hope, or admit a loss.  In fact, many times those same people will double-down, by buying more of the same shares now that they've fallen, which reduces their overall cost per share.  This is a bad move with low-priced stocks, because they can often be on their way towards zero.

On the other hand, there is a much better approach: cut your losses early.

 

As soon as the shares start turning against you, or are not playing out as you had expected, you may want to sell your position to avoid any calamitous losses.

Of course, this is not to suggest dumping your holdings if they fall one or two percent during the normal course of volatility.  Rather, by limiting your downside on any investment to 5% or 10%, you will have the luxury of making many mistakes before they will really matter.

 

The downside limit (or panic-sell some might call it) could even be effective at 15% or 20% below your original purchase price.  The point at which you cut your losses is up to you.

Let Your Gains Run:

I can not stress this aspect of investing enough, especially in penny stocks.  Typically, when these tiny shares explode 10 times in value, the path to get there is littered with profit-takers who sold for gains of 20%, then 45%, then 120%, then...  

The point is that while getting greedy can cost you, and the gains often come so rapidly that it seems like a good move to sell, when penny stocks hit it big they hit it big!  As in massive, life-changing gains of 5 times, 10 times, or even 25 times your investment.

Yes, these example are the exception.  However, when the company you invested in is making more money each month, gobbling up market share, and enjoying widespread customer adoption, then shareholders are much more likely to sell too soon than too late.

Some investors like to sell a portion of their holdings when their penny stock spikes.  This locks in part of their gains, while letting the rest ride, and may be an appropriate strategy for some.  

Before you sell a winning penny stock, reassess them and their business.

 Perform fresh due diligence on the investment from square one.  Even better, call the company and speak with the investor relations department.  Establish if you feel their shares can maintain their new price level.

By simply cutting your losses early, and letting your gains run, your penny stock trading results will be significantly stronger.  You will side-step any big downside, while allowing your winners to win.  Said another way, sell your losers, and keep your winners.