Paper Trading Penny Stocks And Why It Doesn’t Work
The idea for this piece came to me a few days ago. A buddy of mine called, and started telling me about some Forex trading simulation platform he’d been using, and of course, how well he was doing using it. He then told me that once he funded a real account, his goal was to make $1500-$2000 a week. Once he “fine tuned” his trading system of course.You have no idea how hard is was for me not burst out in laughter, but I held it inside. I just couldn’t bring myself to shatter my pal’s dream, or argue about the direction of the U.S. Dollar or the Euro for an hour. However, I will give you guys my quick take on paper trading penny stocks, and why the trading vehicle is irrelevant in the process.
Now, I’ll give you a personal experience of mine from back in the summer of 2009, Citigroup (C:NYSE) was trading right around a dollar. My thought process behind buying it was simple. It had little to do with fundamentals. I simply thought the U.S. government wouldn’t let it fail, and felt the stock would at least go back the 4$ range based on my technical analysis. But, did I buy it ? No. I also basically told anyone who would listen to get involved near that low. But, what did I do ? I paper traded it.
I will now admit that had I owned Citigroup at $1, I certainly wouldn’t have held it to $4, and I’ll tell you why. When you buy a fictitiously buy a stock and enter it on a spreadsheet, to me it is nothing more than a hobby. Just like my fantasy baseball team is a hobby. If you test a trading system and it doesn’t work, you can start over and try another strategy, and add new names to your list of stocks. There are no financial losses to incur, and more importantly, emotions to deal with. Now, as I said before, I never purchased Citigroup and only watched it, and I followed it somewhat closely. However, would I have held tight on the positions, when the broader market was moving up and down 2% on a regular basis ? Would I have held strong after watching multiple downgrades on the banks ? Would I have disregarded all of the volatility that came, from various news conferences and speeches from Obama, Geithner and Bernanke ? In all honesty, the answer is no. I am positive that my emotions would have taken over in that volatile time, and I would have bailed out early. Now Citigroup is not technically a penny stock because of it’s market cap, but I used it as an a example because of it’s low price and my personal experience.
I was also wanted to share this entry because of a penny stock many of us know well. The company is the Lithium Exploration Group (LEXG:OB). The stock went on a tear that you very rarely see. It’s performance propelled other lithium penny stocks higher as well. There were some penny stock traders who made a fortune trading LEXG during it’s run, and of course there were many others that were blown up. Now where do the paper trading penny stocks stand in this ? I think many of them would say, “I bought it at $2 and sold it at $9″, right before the high, but before it crashed. But once again, did they these paper traders factor in the psychology aspect of trading LEXG. Would they have had to stomach to hold after reading negative articles that could easily found through Google searches ? What about the message boards ? While many of the posts are nonsense, from time to time they can influence an opinion ? What about LEXG’s once huge market cap ? It’s easy to disregard being long overvalued stocks when you have no funds on the line.
So what can you do instead of paper trading penny stocks ? In my opinion it’s better to just start very small, with money you can absolutely afford to lose. You have heard old Wall St. “Fear and Greed” before, and it’s become a cliche. It’s also true. So unless you can create you own algorithm, you have to admit that human emotions are one of the most important aspects of not only trading penny stocks, but any investment vehicle.
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