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Reader Questions Answered

Penny Stocks or Forex for the new trader

I had an email come in with a set of questions from one of my newsletter subscribers yesterday.

Two weeks ago yesterday, I began my venture into learning how to day trade. Expect to start in Penny Stocks &/or Forex. Here’s my Q’s…

1. Which one do you suggest I try first, Penny Stocks or Forex? Penny Stocks I’ve studied the most already.

2. How do I open a paper account, (to practice what I’ve been studying about Penny Stocks) the same Broker I plan to open my actual trading account with later, or somewhere else?

3. I like what I see at Peter Leeds web site… the list of Brokers he recommends, (as choices for opening our 1st trading account) and system he’s developed for picking stocks he recommends to those who subscribe to his newsletter. What do you think of his expertise?

Any suggestions for helping us get started, are greatly appreciated.

Let me start with the last question first. I don’t know Mr. Leeds, nor am I familiar with his website, system for picking stocks, or his newsletter. As a result, I cannot speak to his expertise or the value of what he does.

When I am confronted with questions like this my standard response is that you need to make sure whatever product or service you’re contemplating investing your money and/or time in is what you need right now to either further your trader development or to improve the efficiency and effectiveness of your work developing trade ideas and/or managing positions. Way too much money and effort are invested into things which don’t fulfill those criteria. This is largely because the person in question hasn’t taken the time to build up their foundational knowledge and worked through the process of understanding how they need to approach the markets and their own trading. Helping them do that is the major driving focus of what I am trying to do with this site and my various educational efforts.

Getting back to the other two questions…

Penny Stocks vs. Forex
I cannot tell you penny stocks or forex is better. Both have their strengths and weaknesses. A major factor in the decision, though, is time. You won’t be able to trade penny stocks outside exchange hours, so if that is something important then you’ll have to go with forex. On the flip side, there are only a limited number of really tradable currency pairs, so if working with a broad array of potential trading vehicles is important for your strategy, then penny stocks would be the better choice.

One thing I would note here is that penny stocks tend to attract low-capital traders because of their lower cash requirements. This is not a good reason to opt for penny stocks, though, because their lower liquidity tends to mean higher bid/ask spreads than in higher-cap stocks and commissions have a higher negative impact on a smaller account than on a bigger one. You will likely find if you are a very low capitalized trader that transaction costs in forex are smaller.

If you’re new to trading, my advice is to pick one or the other. Working on learning two quite different markets when you’re trading to develop your knowledge and skills will be problematic.

Picking a demo platform
In an ideal world, you’d go with the demo platform of the broker you plan on trading through when you go live. That said, part of the demoing process is also finding a broker whose platform you like. Also, if you’re planning on doing an extended period of demo trading you may be constrained by the time limits that some demo platforms have.