Microcap Trading and Profit Potential
Microcap Trading and Profit Potential
The most obvious benefit of microcap investing is the enormous profit potential that is available for those who are willing to take the risk. Let me be very clear: If you are more of a risk-averse kind of a person, the microcap markets are not for you. You will get blown out of the water, and more than likely you will sabotage yourself by exiting profitable trades early, and at the same time holding on to losing trades way too long, with a false sense of hope that since the volatility was extreme enough for you to lose money so rapidly, it’s bound to “snap back” in the same fashion to where you can quickly regain lost winnings. Truth be told, this can happen–and actually, ANYTHING can happen in the micro cap markets–but more than likely this kind of scenario won’t play out in your favor. It’s always better to approach the markets with a much more sober mindset versus an idealistic mindset, or one that operates from confirmation bias (only recognizing the market movements that confirm your position, while wholly ignoring very obvious market signals to the contrary). What I’m saying in all of this is that you have to be just as aware of the downside risk as you are of the upside profit potential, but not with a fear-based mindset, just an objective and unbiased approach. And yes, this kind of mindset is almost impossible for most human beings to consistently maintain when approaching such an emotionally arresting arena as stock trading.
Leverage is the Key
But anyway, back to the subject of profit potential. The big draw of microcap stocks is the outstanding leverage that they offer. When a stock is trading at $0.10 per share, you have to realize that every one-cent move equals a 10% gain or loss in the price of the stock. That alone is outstanding leverage. So if our $0.10 stock were to move to $0.15 per share, you would have realized a 50% gain in a heartbeat. Yes, this does not take into account commissions and fees but you get the point–a 50% move in short order is not a bad day at the office. At the same time, you have to remember that the door swings both ways…a 1-cent drop in price would then deal you a 10% loss, and further deterioration of price would mean magnified losses for your trading account. This is why a lot of investment advisors warn against trading microcap stocks. Here’s the gospel according to me–you gotta know what you’re getting into from the onset, and if you cry in your soup about losing on a trade, then you weren’t really ready for microcap investing in the first place. This is not a game for the faint of heart. Trading microcap stocks is very much a speculative affair, like it or not. I remember reading somewhere that compulsive personality types and gambling types seem to gravitate towards riskier areas of trading such as microcap stocks, and to a certain extent I can see where microcap trading would be considered a form of “thrill-seeking” by those types of personalities. Heck, trading can give you a rush, no doubt about it, but you better be serious about what you’re doing, or you’re going to thrill-seek yourself right into financial oblivion. Truth be told, thrill-seeking has no place in sound trading. There’s no way that you can be that emotionally tied to a market and do well in it. You have to learn how to separate your emotional reactions to market movements from the actual trading process, otherwise you’ll never see significant profits in the microcap investing arena.
