Small Cap Trading Tips for Beginners


Have you ever bought into a high-flying stock full of excitement and dreams that you sit around thinking what you will do with all the money you are going to make, and then find yourself crying into your bed pillow the next day saying “why, why, whhhhy?”

Good news is you are not alone as we have all been there, and you’re not stupid, but rather you just made some basic trading mistakes many smaller and even experienced traders do all the time.

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Rule #1: Don’t trade on emotion!

The biggest mistake many new traders make is trading off their emotion, and not having set discipline on when to buy, and when to sell. This is something even the most experience trader will tell you is something they fight all the time when trading small cap stocks even to this day.

You may see a hot stock being discussed and your brain tells you get in before it’s too late, and then you find the next day the stock has dropped 30% or more. Then you make the second biggest mistake and start to panic as your losses build and you sell into the fear and wonder why you just did that.

The dopamine levels in brain, which gives us a feeling of joy and euphoria, shoot off when your stock is going up, and goes down even more when your stock is dropping.

Teaching yourself a good set of principles and discipline is first good key to become more effective trader. DISCIPLINE!!!

Rule #2: Don’t swing for a home run when a single or double is just as good

New traders see stocks up 100%, 200%, and even 300% and want to experience those type of returns. The secret is no one really gets these types of returns, or rarely do, and you shouldn’t expect to either. Set yourself a realistic goal like say once you’re up 20%, 30%, or even 40% you sell ALL or part of your position to lock not just gains, but back majority of your original investment principle.

Contrary to popular belief it’s NOT about making money, but rather not losing the principle you originally invested with.

Rule #3: Don’t chase a stock, and watch the RSI

The biggest mistake new traders make is seeing a stock running and so wanting to be in the game they tend to chase a stock after it has already run up a great percentage amount. This is a quick way for you to start losing your initial investment principle and want to go cry in your pillow at night.

One good tip for new investors is to look at a stock’s RSI on the daily 6-month chart. The RSI, which stands for Relative Strength Indicator usually trades in a range from 30 to 70. A simple rule of thumb is an RSI of 30 or lower means stock is oversold, and 70 or higher is overbought.

It is not written in stone, but if you see a fast running stock, and it has an RSI of say 70 or higher, don’t chase it but rather wait a couple of days for it to sell back off. Usually when RSI is above 70 smart traders will take profits, and that is when you see those sudden 30% down days….usually the day after you bought in.

Could a stock with an RSI above 70 keep running up? Absolutely, but you must tell yourself wow I miss that opportunity, smile, and just wait for RSI to pull back down to get in. After a hyped stock makes a strong run, and RSI gets way above 70, or even 80, you may want to wait couple days till the RSI gets back to 50 to 60 range before stepping into stock as that flushes out the weaker traders selling into panic (see rule #1)

Rule #4: Everyday does not have to be a trade. Wait for the beach ball sized pitch to pull the trigger

Every day we wake with excitement on what could possibly happen that coming trading day. That is a weak flaw in your brain that makes you want to feel that excitement and euphoria on a trade, and in long run will be sure way to lose your money fast. Instead you must get in mind frame that not every day is a day for a trade, but rather wait for that opportunity that is just perfect you know you got in at a decent price.

Warren Buffet once said he gets pitched investment opportunities all the time but may only make 3-5 trades all year. He said he has trained himself to be disciplined to wait for that opportunity that when it comes to him it’s like a pitcher throwing a beach ball size baseball to hit, and he knows that’s the one to swing for.

If there is no PERFECT trade to be had that day that is ok! Tomorrow is a new day, and that next day may offer you an even better opportunity in that one stock you really like at a lower price. Wait for the perfect opportunity before the masses have already run up the stock. The world won’t end if you don’t make a trade that day, trust me!

Rule #5: Don’t put all your eggs in one basket

I’m sure you have heard this expression, and it’s a good tip for new trader looking to learn the tricks. If you have a small amount you are starting with try spreading in between two stocks you like, and that fit the above tips. If you have a more moderate size, then spread it out between say 2 to 4 plays. This way when one stock you have has a really bad day, and trust me they will, you won’t be so damaged and depressed as your losses won’t be as bad.

Rule #6: If up big sell a portion, and let rest ride

If you are lucky enough to find yourself up 100% on a trade, congratulations! Now don’t be a greedy and start selling off some of those gains.

Remember in rule 2 it is NOT about making money, but rather not losing the money you have invested with. So, if you bought a stock at say $0.01, and suddenly it is at $0.02, you should sell half your position as that will give you back ALL the money you invested, and that will leave you with a bunch of free shares that are PURE profit. There is no such thing as a bad profit so don’t get greedy.

Always remember: Bulls make money, Bears make money, but Pigs get slaughtered!

Rule #7: Go outside and walk in the park

This is a very important rule for building better discipline and avoiding possible stroke or other health issues down the road. Sounds funny, but it can be deadly serious as stress and can be a major killer, and you don’t want to go down that road.

One tip is to set your limit sell orders once you reach your desired target, or place in stop loss orders well below market price so not to get stopped out from daily swings. Then most important….go out for a walk! Go to the park, listen to the wind in the trees, meditate to music, or even start a walking or quick hiking program for an hour or so a day just to get away from things. You have your sell orders set, and you staring at the screen is NOT going to make the stock go up or down by watching it, so go outside.

Your brain wants that rush off dopamine, but that in long run will only make you sick, depressed, or angry. Worse, it will make you more likely to make a rash buy or sell decision when it would have been better off just going outside. Buy into a good story, get a good low price, set your sell limit orders, and go out and enjoy your life.

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These are just a few simple tips Ludlow Research has put together for beginning traders. If you would like to join their trader newsletter for more tips like these just sign-up online for free at

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