One of the things that many investors can get very frustrated by in trading stocks is the waiting. The waiting is the hardest part; especially when you’re dealing with a speculative, micro-cap stock which may have very low trading volume. With low trading volume comes higher volatility in the stock price. Your stock may be in a holding pattern because the company may be waiting for some news or reclassification or other market moving information. However it’s important for new investors to follow these three rules when trading in a low volume/high volatility stock so that you don’t lose your mind with the waiting and you don’t break the bank from the losses.
Average in/Average Down: The temptation can be very real when you get some news on a small-cap stock to want to sell out of all of your other positions and dump all of your cash onto the one stock. While that may work in theory, in practice it is often far less true. Yes you may miss times when you could have made a lot more money if you had just gone all-in at once; more often the truth is that you will put in all your money and lose all of your mind. Even after a brief pop, your stocks value will invariably come back down. Probably. For that reason when you are dealing with small-cap low-volume high volatility stocks you need to average in and you need to average down. That means if you buy stock in at a dime and it goes down to a halfpenny, you’ve just lost so much money! However if you average in and buy a few shares at a dime, wait, then buy a few more shares at a pull back to a nickel, wait, then buy more shares at a half penny when it has reached its bottom, you will be doing much better than in the first example. Averaging down takes a lot of the volatility out in a low-volume high volatility stock because; on paper; you are actually losing far less money than if you had gone all-in.
Go Outside: Another trap smalltime investors fall into is following their stocks on a tick-by-tick basis. You cannot stay glued to the computer screen when you could be doing so many other things; cook your wife dinner, knit a sweater, go throw a frisbee with the dog, just to do anything else but don’t watch your stocks every second of every day! Unless you are an experienced trader you’ll be wasting so much time by doing this. Moreover you’ll look a little crazy. One of the keys in order to be successful in stock trading is not to watch the movement 24 / 7. It’s about knowing how to diversify your geldanlage. There are several platforms that you may consider. You just have to be strategic about it.
Set Your Stops/Hold Your Nose: One thing every investor needs to know is when they want to get in, when they want to get out, and what is the most they will lose. If the answer is that you don’t want to ever sell at a loss, then that makes setting your “Stop Loss” a little easier. Say you invest in 100 shares of a $5 stock for $500. You’ve decided the least you want to walk away from the table with is $200. So you set what’s called a Stop Loss for $2. Then you will most likely find someone to buy your stocks on the way down. Not always but usually. And that is how you guard against that.
We didn’t come to the investing world to lose money though so if you’re feeling lucky or if you’re feeling confident, then you need to trust your gut. You can’t quibble too much over these tiny details; you need to be strong in your investment hypothesis. Because in low volume periods or in low volume stocks you’re going to experience volatility; you need to be prepared for that. You should never invest in a stock before you’ve decided when to get in and when you want to get out; that includes on the upside. If you’re going to hold on to a stock for 50 years; then you don’t need to set your sell orders. However if you are like most of us you have an idea of when you want to get out then you need to set your sell order. Say you would love this stock to go to $36. So you buy at $5 and you set your sell order at $36. This doesn’t often happen, but if it does, you’re going to do alright.
Setting your stop loss and sell orders is a great idea because this means that you don’t have to follow the stock. Low volume high volatility stock movements can be maddening; it’s a good idea to just set your sell orders and walk away. Once you have set your stops, you will be fine and can go knit a sweater, cook a meal, and play with that dog; your whole life will be much richer because of it.