Risk is inherent in pretty much any activity in life. Just walking out onto the sidewalk leaves you open to rainy weather or the remote chance of a car jumping the sidewalk and striking you. Both of those unpleasant situations have certain odds of happening, so you can measure your risk, if you so choose, before taking action. As a day trader, keeping up on your risk profile is part of the job. Controlling that risk is essential to being a profitable trader. Which is why it makes sense for aspiring day traders to avoid OTC markets when they are just starting out.

OTC markets are over the counter exchanges where small-cap stocks that do not make it onto the larger, more established exchanges are traded. The small price and small market share don’t always mean small profits. But they do mean big risk. Because information about companies on OTC markets is much harder to come by. The larger exchanges like the New York Stock Exchange and NASDAQ are much more diligent about requiring companies to disclose lots of financial information. That gives traders more to work with.

When you are working with companies that don’t disclose a lot of information, the risk is being caught up in a pump and dump scheme. The pump and dump scheme comes when a market maker or large scale investor buys up a huge amount of shares of a smaller company and then exploits the financial media and all sorts of information avenues to pump of the price of that stock. They talk up the company and make sure everyone in the market knows it is the next big thing. Then, when the stock price rises, they sell off the share for a huge profit.

Of course, as a day trader, it is possible to make money during the first phase of a pump and dump scheme. But to do so, you need to have the experience to recognize one in progress and the skills to be able to get in and out at the right time. That is how you can make money as a trader in the OTC markets. The key is you have to be a very good trader. And to get to be a good trader you have to put in the time to get really good. You have to learn how to balance risk and reward. That takes screen time and lots of mistakes.

You can afford to make mistakes when you are paper trading. Paper trading is easier because  you can trade in a virtual environment that allows you to work with simulated currency and make trades that mimic the real market. It is like a video game. But you get to practice a real marketable skill like day trading and make moves that will teach you about the stock market. Sometimes the mistakes will teach you everything. Adn when you make a mistake and lose a lot of virtual money, it doesn’t feel quite as bad as losing a lot of real money.

Categories: Stock Market