Penny Stocks - How To Limit Losses

Of all the investment options available to investors and traders, the ones with the highest risk are the penny stocks. How to limit losses and, in consequence, how to maximize profits despite the highly volatile nature of microcap shares are the first questions cautious traders will ask. Take note that the emphasis is on limiting the losses from the trades precisely because all stocks, be it penny or blue-chip types, will undergo a drop in value at one point or another.

Your job as a trader is to lessen the possible damage to your total investment portfolio that losses in penny stock trades can inflict. You may experience losses but your capital is still substantially intact so much so that you can find another profit-making trade with the money saved from total wipeout.

How is this possible with penny stocks? How to limit losses when the stock market is generally down from the global recession? Before these questions can be answered in a satisfactory manner, we must emphasize certain attitudes toward the behavior of penny shares.

First, you should stop thinking along the lines that penny stocks with falling prices will not go any lower and that these shares will eventually turn around for a good rally. Your capital investment is in great danger of being lost in a total wipeout because of microcap stocks that are in a steep downtrend. Your losses can become unlimited.

Second, you must sell when your losses hit the target mark. If you set losses at $1,000 for the penny shares, sell these stocks as soon as the mark is reached. Otherwise, your losses will become bigger and the money that could be used for other profitable endeavors will be lost as well. Don't be greedy - that's all we are saying.

Indeed, it is impossible to avoid losing stocks at all times because losses are inevitable in the stock market. The good news is that it is not impossible to limit your losses when two principles are applied during your trading of penny stocks. How to limit your losses boils down to:

• Price Barrier - This is simply the level at which the price per share for the penny stocks will have a hard time falling below the support level. For example, the ABC penny stocks may sink to $1 per share many times although it always bounces back up without falling below less than a dollar. The support level may then be $1 for the penny shares.
• Stop Loss Orders - We must note that the OTC Bulletin Board does not allow for stop loss orders although the Nasdaq and Amex allow these kinds of transactions. Also, you should only adopt stop loss order when the penny stocks have high trading volumes and low levels of volatility. Stop loss orders are likewise not suitable for beginner traders.

With these ways, you can protect your investments in penny stocks. How to limit losses using the abovementioned ways involve identifying the price barriers for the microcap share, placing in your orders for the shares near albeit slightly above the support level, and then putting in the stop loss order at just below the support level. For example, you will buy the stocks at $1.01 (support level is $1) and then the stop loss order is at $0.98 per share.