Penny Stock Position Sizing

It is a well known fact that penny stocks are risky. Even the best penny stocks contain substantial risk factors. Many traders pick a stock from the readily available lists of the top 1000 penny stocks or even the top 10 penny stocks mistakenly believing that using these lists will mitigate risk.

Nothing could be further from the truth; these lists depend on what happened in the past. Just because a stock made the list has nothing to do with what will happen after you buy it. There simply isn’t enough due diligence performed to narrow down the choices.

The best way to mitigate risk when trading penny stocks is to position size properly, diversify, and use the services of a proven penny stock advice service to perform the proper, real time due diligence.

Position sizing properly in penny stock trading means to never trade more than you can afford to lose in any single trade. You see, a complete loss is genuinely possible when trading penny stocks. Even with the best due diligence, crazy unexpected things can happen in the penny stock market.

A good rule of thumb to follow when position sizing for penny stocks is never risk more than 5% of your trading account size on any one penny stock idea. This means that if you have allocated $100,000.00 to your active trading account, never allocate more than $5000.00 in any one penny stock idea.

This amount provides you enough capital to really benefit when the stock doubles or triples as you expect. However, at the same time, it’s not enough to hamper your next penny stock investment even if a disaster happens in the stock price.

Now, if you have less conviction in the validity of the penny stock idea, use less capital. Remember, you can always add more up to the 5% should the stock be profitable.

Source: http://tradingtips.com/daily/penny-stocks/penny-stock-position-sizing/