What Are Penny Stocks?
While there is no official definition of a penny stock, they are generally thought of as stocks priced under $5. Many people have their own definition of a penny stock, such as those stocks that trade on the Over-the-Counter Bulletin Board (OTCBB), stocks with a share price of under $5, or some even define penny stocks by their market capitalization.
Using my own personal definition and trading preferences, penny stocks roughly include all stocks under $10, on all exchanges, of all sizes by market capitalization, but importantly, this is not a hard and fast rule. Many of the principles contained in this book also apply to larger stocks.
There are two different types of penny stocks. Those established companies that have mature business operations, and are listed on a large exchange (usually NYSE or NASDAQ).
The second type of penny stock is a company that is listed on the AMEX, OTCBB or Pink Sheets, usually a growth oriented company in its start-up or early growth stage. Many of these companies first list on a smaller exchange because of the lower barriers to entry and costs involved, however many ultimately graduate to a more senior exchange.
Trading the two different kinds of companies is similar from a technical perspective, although how you interpret things such as press releases, earnings and the analysis of financial statements may be quite different and can sometimes be difficult.
In the following sections you will gain valuable insight into:
- The basics of penny stocks
- Volatility of penny stocks – are they really that unpredictable?
- Why trading penny stocks can be infinitely more profitable than investing in large cap stocks
- What influences the price movements in penny stocks
- How to avoid wealth destruction
- How to profit from “undiscovered” penny stocks
- The difference between penny stocks and large stocks that the professionals trade
Penny Stock Basics
I want you to forget everything you have ever read about penny stocks. I will debunk the myths about penny stocks and expose them for what they really are. Read on.
Penny Stocks can be volatile and generally thought of as highly unpredictable and risky. After reading this book, you will see that penny stocks are actually highly predictable and less risky than larger stocks and other instruments traded by the big guys on Wall Street.
Because of the more speculative nature of penny stocks, their lower price, and more relaxed reporting requirements of the exchanges they are listed on, big Wall Street players such as Banks and Institutions do not generally trade or invest in them.
My timeframe for trading penny stocks is usually 1-3 days, but can vary from a few minutes to a few weeks, depending on the circumstances.
Why Trade Penny Stocks?
Penny stocks can be volatile in terms of their price movement, they can go (up or down) double or triple digit percentages in a day or less, but contrary to most people’s beliefs, these movements are often very predictable.
You see, large stocks are traded mainly by big players on Wall Street such as Banks and Institutions.
These players have significant resources at their disposal, use algorithmic trading methods, employ advanced trading techniques and often have access to news and information well before the small retail trader. Therefore, in reality, large stocks are often manipulated as much as, if not more than, penny stocks.
Now pay attention. The traditional rules of trading contained in many other educational resources no longer apply. Penny stocks have their own sets of rules. With penny stocks we are no longer competing with big Wall Street players that can and do use manipulative techniques to profit. With penny stocks we are competing against much less sophisticated and intelligent players with fewer resources, giving us a significantly better opportunity to compete and profit.
Differences between Large Stocks and Penny Stocks
There are many differences between penny stocks and larger stocks, which are traditionally thought of as safer investments, such as Apple, IBM and Google (usually listed on the NYSE and NASDAQ). Some of these differences are summarized below:
Exchanges and Regulation
Given our definition in our introduction, penny stocks can be listed on all exchanges. However the majority of the penny stocks we discuss in this book are traded on the OTCBB, Pink Sheets, AMEX, and NASDAQ small cap market. Very few, if any, trade on the NYSE.
The reason why many penny stocks trade on the OTCBB and Pink Sheets is because there are less regulatory requirements to comply with. This is an important consideration for a small company as it is too costly to comply with the requirements of the larger, more reputable exchanges such as the NYSE.
Another important point to note is that the Securities and Exchange Commission (SEC), the governing body of the financial industry, tends to focus much less on companies listed on the OTCBB and Pink Sheets. The main reason is because of the relative low number of investors in OTCBB and Pink Sheet companies and the SEC’s lack of resources to pay attention to everything.
The majority of online discount brokerages allow trading of penny stocks, although some do not allow trading of stocks on the OTCBB and Pink Sheets. Some brokers do not allow the short selling of stocks trading under a certain dollar amount. For my strategies to work most effectively, it is important that you find a broker that allows trading stocks on all exchanges.
I personally use and recommend Interactive Brokers, which allows all of the above; however you need to deposit a minimum of $10,000. Other brokers I recommend are Think or Swim, TD Ameritrade, and e-trade. However there are many others you may wish to research.
Trading vs Investing
As previously touched upon, this book is more geared to trading, not so much investing. The scope of this book is to educate people on effective strategies to profit in the short and medium term by buying penny stocks, however many of the principles taught may apply to all stocks and as well as other investments.
There are variations to the kinds of trading that people participate in, such as scalping, day trading and swing trading. I will not distinguish between them, however suffice to say that my definition of trading is the “buying and selling of a stock with the intention to profit from predictable price movements”. The time frame does not really matter to me. I will enter and exit a position in a stock within minutes or days, even weeks, depending on how the stock is acting. My strategy usually dictates that I hold my trades for 1-3 days, or up to several weeks, in order to capture the biggest price movements.
Investing on the other hand usually involves buying a stock and holding it with the hope that the stock will rise over the long term, and/or pay regular dividends. It usually involves some fundamental analysis of the company, its industry etc. Buy and hold investing is by far the most popular form of investing. Investing usually ignores temporary price fluctuations because the belief is that the stock price will increase over the long run.
Trading using my strategies does not involve a crystal ball or require you to predict the top and bottom of a stock’s price. It requires you to react to a stock’s price movement, rather than try to predict a stock’s price movement. Nobody can or ever has been able to accurately and consistently predict stock prices over the long run.
I will never let a trade turn into an investment. People often do this when a trade goes the wrong way on them, and they decide to hold it for the long term thinking the stock price will recover.
For someone using 20% of their capital for each trade, it will only take five trades for them to tie up all of their trading capital and no longer be able to trade without using leverage.
Rules and Trading Psychology – THE Most Important Lessons You Will Ever Learn
I absolutely mean it. The lessons you will learn here are an absolute MUST.
Trading psychology encompasses various aspects, but it is the number one thing you need to master in order to trade successfully. Trading without a set of well defined rules and control of one’s self is stupid, irresponsible and simply dangerous, and is a sure fire way to destroy wealth. On the other hand, some well defined and understood rules, and mental control, can yield more profits than you ever imagine.
The only difference between a successful trader and a failed trader is not their technical knowledge or skills, but is their ability to master their emotions and strictly adhere to a good set of trading rules.
Please read and reread this entire section until you grasp these simple, yet powerful concepts.
9 Important Rules Every Trader Must Abide By
Having a set of rules and abide by them may seem obvious, and it is. But the simple truth is that most people force trades that do agree to their rules. In fact, most traders do not even have rules!
A few years ago Mark Crisp conducted a survey of 1,000 traders and found the following:
1) Over 84% of traders have never read a book on the stock market.
2) 76% do not have a set of rules (a system).
3) Over 80% do, or have, relied on their broker for advice. 4) Over 84% have, or do, trade on news stories.
5) 84% rely on technical analysis.
6) 89% have never shorted a stock.
7) 93% have, or do, use an advisory service.
8) 72% consider themselves short-term traders.
9) 68% consider themselves “good” traders.
10) 94% have never practiced money management simulations.
11) Over 73% admitted they were losing money trading their own accounts.
So then, what are the trading rules that one must learn in order to be a successful trader. Well, the answer will vary depending on the style of trading employed, your personality, availability to trade etc. All of the lessons in the book should be considered rules. Indeed, my personal trading rules are compiled from all of the lessons in this book. I have however outlined a few absolute fundamental rules below that I live by, and believe are the cornerstone to every successful trader.
Rule #1 – Know thyself
Every trader is different. Different personalities, trade in different environments, have different levels of education and have different goals. Therefore any one style or system of trading will not suit everyone. It is essential that you know your strengths and weakness, first of all, with your personality, and then as you gain more experience in trading, your technical strengths and weaknesses.
Therefore, every successful trader must identify their strengths and weaknesses and trade using a system that suits them, all the while constantly trying to improve themselves.
Finally, you probably will not know your strengths and weakness, or will not find a trading system that suits you, until you begin trading. That is why trading with a paper account, and then graduating to employing only small amounts of capital your trades, is paramount to success. You will quickly become accustomed to your idiosyncrasies.
Rule #2 – Follow a system
Every trader needs a system to follow. Whether it is trading penny stocks or scalping highly liquid large caps, a system allows you to automate the trading process. You see, trading is a mechanical process. A good system avoids the need to employ human emotion. The better the system you have, and the more closely you follow it, the better your chances in identifying and executing high probability trades.
I am not aware of any credible study that has proven one trading system to be more effective than another over the long term. Find a system that works for you and stick to it.
I and many others have profited handsomely by following the systems outlined in this book. If you are reading this book, I have to assume that you have not yet been able to find a system that suits you. But importantly, remember that it is the discipline to develop and stick to your trading rules that will dictate whether you succeed as a trader.
Rule #3 – Embrace Boredom, Don’t Fight It
Boredom leads to forced trades that do not adhere to any strategy or fit within any rules. Forcing a trade because of boredom, or a lack of ideal setups, is a psychological issue you MUST overcome.
Random trades are the surest way to destroy your account.
I have been trading for over a decade, through many different trading environments. Believe me, there is ALWAYS another opportunity around the corner. I once did not make a trade for a whole week because of a lack of ideal setups and an overall choppy market that did not give me confidence to make a trade. The wonderful thing was that I did not lose one penny, and coming out of this slump there were an abundance of opportunities. Too many to take advantage of in fact.
The market has and always will be an attraction to those with stars in their eyes. People will always be drawn to the market, which means that there is literally a revolving door in the world of trading. There always has been and there ALWAYS will be opportunities to profit so long as fear and greed remain part of our psyche.
Rule #4 – Plan Your Entries and Exits Before Entering a Trade
It is essential that you have a plan, albeit sometimes a rough one, of when you are going to enter a trade and exit a trade. Entry points are the easiest to plan for, because if you follow your strategy, price action will dictate your entry. For example, a swing trader might enter a trade when a stock has retraced and consolidated for several days after breaking out past its previous high, and is sitting just above its 50 day moving average. Here, the entry may be at a price at the higher end of the consolidation range in anticipation of it breaking out further.
The exit is a little more difficult to plan for, however it could be based on a dollar amount, percentage amount, or at a point within technical indicators on a six month chart, of course always taking into account the actual price action of the stock.
Conversely, but as important, is planning an exit should the stock not perform to your expectations. I call this a “contingency” exit, or “plan B”. In the above example, a good trader might plan to exit the trade should the stock fall below the 50 day moving average, fall below its previous high (which is now the stock’s level of support), or fall below a key price level, such as a round dollar amount (where many stop losses may be placed). Because the stock has already retraced and consolidated, this downwards movement could signify a pattern reversal, or breakdown.
Many traders use a risk/reward calculation, whereby the potential for reward may be four to five times their risk. Again using the above example, if you entered a trade at 5.35, above its moving average of 5.05 and its previous high of 5.15, you may plan to exit your trade when the stock hits 6.15, a 15% return, while limiting downside risk to $0.20, or 4% (at $5.15, the level at which the stock has a new level of support). Of course this is only guidance that is not set in stone. Price action of the stock trumps all, and is essential to follow.
Finally, if you ever find yourself loosening your stop loss in order to accommodate a trade that is not acting as expected, exit immediately. It means that your entry may have been a poor one, or the stock is not acting as expected. Learn from this to ensure your entry is more precise.
Rule #5 – Patience, Patience, Patience
Patience is always a virtue, particularly for a trader. This rule ties in to rule #3 above – embracing boredom.
It is important that you have the patience to wait for ideal setups. When you enter a trade that is setup ideally, be patient with it – give it time to insulate itself from random noise and to play out as anticipated. Give it time for others to see the merit of what you saw earlier; but be enormously impatient with losing trades.
Small losses are the best losses, and anything more has the potential to cripple our mental as well as financial capital. It is quite possible to make money trading if we are only “right” half of the time, as long as our losses are small and our profits are large.
If you missed a trade, wait for a pullback, and then a reformation of an ideal setup. Chasing a stock means you are not adhering to any rules or systems. Wait for the pullback and an equally ideal setup to the one you just missed. It is an entirely new trade now.
And remember, not having a position, is a position – usually a financial and mental capital protecting position.
Rule #6 – Do Not Diversify
Not only does it make it harder to make money when funds are employed across a number of trades, it also makes it riskier because you cannot pay attention, and respect, to that stock in which you have a position.
I only trade two or three stocks maximum at any given time. I prefer only one trade at a time. I watch the price action of most stocks I trade like a hawk, with my hand on the mouse ready to sell or cover at any moment throughout the trading day.
Price movement can change or even reverse on a dime for any number of reasons; therefore it is important that you truly focus on each and every trade. You cannot intimately follow a stock when you have a half a dozen positions or more.
Furthermore, it is unlikely that there are any more than a few stocks that have an ideal setup at any given time. Therefore, if you are sticking to your rules, and only entering a trade that has an ideal setup, overtrading should not be an issue.
Rule #7 – KISS
Keep it Simple Stupid; A beautiful old adage that I apply to many aspects of my life. In trading, it is especially important to keep everything simple, from your technical analysis, to the information you use, even your trading setup at home. All too often I see novice traders with three or more trading screens, subscribing to a variety of trading services and charting packages, using algorithmic filters they do not fully understand. This is counter-productive, and distracts you from what you really need to focus on.
While many people attempt to use all kinds of sophisticated technical analysis, such as Elliot Wave, Bollinger Bands and MACD, I stick to the basics (as previously mentioned). This has worked for me successfully for many years. In my opinion, the majority of the people who use advanced technical analysis do not fully understand it, nor do they understand how other people use it, thereby limiting its effectiveness – remembering that technical analysis is a self fulfilling prophecy. The more people believe and act on something in the same manner, the more it is likely to happen. Thereby if we stick to simple analysis that the majority understand and use, the more effective it is likely to be.
Do not unnecessarily complicate your physical trading environment, your stock screeners, charting software, or use of multiple trading systems and internet forums. Find something and stick to it. Everything else just creates noise and distracts you.
Rule #8 – Markets (and Stocks) are irrational
Forget what the academics say about the markets being efficient. In the short term at least (which is a traders timeframe), they are not. The market can be completely irrational, as it was in 1999 during the “Tech Bubble” or in March 2009 during the global financial crises, and at many times in between.
Individual stocks can behave even more irrationally. Stocks can go parabolic on some “fluff” news. Or they can drop 80%-90% in a day on bad, but not existence threatening, news.
My point here is that where there is a strong movement either way. Don’t try to be a hero and jump in front of it. Many people say “the trend is your friend”. I disagree to an extent, however you certainly do not want to fight the trend because “you think that the stock has to go lower (or higher)”. Again, the market is always right, you are not. If you try to fight the trend, because “you know better”, you are destined for failure.
In essence, it makes no difference to me whether the stock is going higher or lower in an irrational manner. I profit on buying and short selling at key inflection points from watching closely the price action. If the stock breaks out and breaks down irrationally, I will be there to profit, using the strategies and rules outlined in this book.
Because of how I trade, stocks are never too high to buy, or never too low to sell. Every time I think to myself, “surely that can’t go any lower” (which can prevent me from executing a short sell with a great set up), it indeed goes lower. The same happens on the upside.
Knowing the market and individual stocks act irrationally, and training yourself mentally to work within this parameter, will make you an infinitely better, and less risky, trader.
Rule #9 – Money Management
Without trading capital, there is no trading. Protection of your money is the most important aspect to trading. By learning how to trade, how much funds to employ, how and when to take losses (and gains), you will protect yourself from horrendous losses that will take you out of the game, permanently.
There are several money management rules here that I adhere:
- Limit the use of leverage – I do not trade Futures or Forex, so I have little need to use leverage in my trading. I sometimes trade an option straight up, which is essentially using a form of leverage, but I rarely borrow money or use funds that are not my own. And I have never had my broker make a margin call on me.
- Take Small Losses – I never let my losses exceed my predetermined limit going into the trade. This limit changes depending on the size of the trade and the particular stock etc. Having the discipline to admit you are wrong and to move on to another ideal setup is vitally important.
- Have a maximum dollar position on any one trade – I usually enter a trade with 10-20% of my total capital, depending on the liquidity of the stock. Sometimes the stock is not liquid enough for me to do this. However I never use more than 30-40% of my capital for any one trade, no matter how perfect of a setup it may be. Remember, stocks act irrationally, and any piece of news that comes out, or message board chatter, could have dramatic effects on the stock price.
- If you are a trader, never Invest for the long term – I do not have any side investments that I hold for the longer term. Because I am a successful trader, my returns far outweigh what I could achieve if I was a longer term investor. Having side investments only ties up capital and distracts you from your trading goals. All of my unemployed trading capital is held in interest bearing money market accounts with my broker.
- Be sufficiently capitalized – Many of the students I have taught only have very small accounts, which is fine. They trade part time so they can build their account while earnings a salary or wage. After all, buy and hold investing has not served them well in the past. However if you wish to trade full-time, it really is important to have enough trading capital so that you are not burdened by the Pattern Day Trader rule, and so that you have enough “margin” to take advantage of the many short selling opportunities that you will be presented with. Of course the appropriate amount of capital will be different for everyone, as people have different expectations, living standards, commitments etc.
Give your Ego the Day Off
First of all, I have an ego, albeit a small one. I think you need to have an ego in order to be successful in life. I mean, it is only those with some arrogance (and ego) that have the confidence to take risks in order to better themselves, their business, or whatever they are involved in.
When it comes to trading, this ego should be tucked up in bed and given sleeping pills so it stays asleep well after you are up and begin trading. Ideally, it should stay in bed until 5pm, when it is safe for it to reunite with you. You see, the market is a massive sphere with which individuals participate all with the same goal, to make money. Stocks don’t move because somebody wants them to move.
Stock’s movements are a function of supply and demand. The factors that affect supply and demand are many. Hope, pray and wish are not any of them.
Never, ever, think that you are right when a position is turning against you. Most traders rationalize their losses by telling themselves it was not their fault, while every gain was a result of their intelligence or superior abilities. Thinking that a position will turn around because you think it should is downright stupid.
Unless you are a successful trader and your timing was off on your entry into the trade, and have the experience behind you to reassure yourself of this, then chances are you are wrong about your trade and it will continue to go against you.
Of course, the more experienced you are, and have built a track record of good trading performance, your confidence will grow. Once you have confidence, and stick to your trading rules, giving a trade some extra time to play out can be quite appropriate.
The easiest remedy to handle a trade that is going against you is to exit this trade immediately. Exiting a trade should be planned before you enter a trade, and by sticking to the rules detailed below, this should not be too much of a problem. Your overriding goal is always to stay in the game. You cannot take advantage of the opportunities that will always come your way if you have no trading capital.
And remember this. The market is the sum total of the wisdom, and the ignorance, of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.
This seems like a rather basic concept, understood by most. Believe me, you are wrong. Most people listen to the BS about trading being fun, easy, portable etc and get sucked in, only to realize it is the EXACT opposite. I mean, it is fun when you’re making money, don’t get me wrong, but when you’re not, there isn’t anything less fun than trading.
The hard work comes mainly from the preparation and hours of concentration you need to commit. I spend around 2-3 hours preparing each night for the next trading day, and then start my trading at around 6:30am, reading and often trading the news, in the pre-market. I then stay glued to my screen if I have a position, and end the day at around 6pm, after I have finished monitoring and trading the after- market session.
As I will discuss later in this book, preparation is easily the most important part of your day. Without identifying stocks that have high probability setups, and then anticipating entry and exits, you will simply be fishing when the market opens. Even worse, you will search for something that is not there, or perhaps open your ears to a chat room or message board for inspiration. Failure at this point is almost guaranteed.
Losses are NOT good
All of us from time to time have heard that you must lose before you can start to win, and that you learn a lot from your losses. It is inspirational when a successful athlete or businessman tells his or her story about their failures before their successes. It is true that you can learn from your losses, because it is only after a loss, usually a big loss that we stop, take deep breaths, analyze the cause and take steps to rectify.
The problem is that people inherently revert to what made them lose to begin with, repeatedly making the same mistakes time and time again. In fact, most people never knew the right way to begin with and therefore have nothing to look to for guidance or to benchmark against.
Even worse is that most people make the same mistakes over and over again, only deciding to change their ways or seek help once they have hit rock bottom. In trading, rock bottom means losing your trading capital, thereby putting you out of the game.
Further, losing in trading adversely affects your mindset. Your mental capital is eroded. Trading is all about confidence. You need to know that each trade you make has been carefully thought out, adheres to your rules and strategies, and will be successful. When you lose, you begin to question yourself, make poor decisions, and force trades. The last straw is when you begin revenge trading. Just like at a casino, you double down on the same stock with the same position, not recognizing you are making the same mistake, but with even more at risk.
If you learn to trade properly, using well defined rules and a proven successful strategy as outlined in this book, there is no need to lose. Of course you will lose some trades. Even the best traders in the world make losing trades. However, losing will be an exception to the rule. Your winners will be far and away exceed your losers, and it is only at this point where you can accurately reflect and analyze a loss.
Until then, you should avoid losses with real money. This may mean you paper trade, or trade with small amounts of money, until you have enough wins under your belt to convince yourself that your rules are worth following and that the trading strategy you have employed is successful, so that you gain confidence.
On the same token, a winning trade that is made by not following your rules is not really a win at all. It is luck. I recall a time that I chased a couple of trades on spiking Biotechnology companies and profited handsomely, completely ignoring my own rules and strategies. My ego got the better of me and I continued to ride my luck in this vein for on several trades over the course of a few weeks, and with my final trade I lost over $30,000. The net loss from these trades was around $6,000.
Do not Panic
Panic, I would suspect, is the leading cause of the major losses suffered by an inexperienced or undisciplined trader. It usually comes about when a position is turning against you.
I see many people taking unacceptable losses on positions they held too long, and then to compound the problem, exit the trade at the worst possible moment. This is particularly true of inexperienced short sellers. They enter a trade, its trades sideways (or at best, up and down in a choppy fashion). Convinced the stock is destined to fall, the trader holds their position. Suddenly, because of the price movement, experienced traders jumped in pushing the price higher.
Momentum takes over and suddenly the stock is up double digits percentage points. Even worse, unexpected news hits the wires, putting further upward pressure on price. The trader, seeing substantial unrealized losses on his or her screen, finally folds and covers their position, through buying the stock back. Usually when the stock is in amidst a temporary spike.
Good traders sell into such spikes; novices buy.
Alternatively, those inexperienced traders who are long a position will see a stock capitulate. The trader, believing the stock will rebound, holds their position. After no such rebound, the trader then justifies their trade by calling it a longer term “investment”. That is, they think the stock cannot go much lower, and if they just hold on for a while, the stock will increase. The stock never returns to its previous price.
The trader, frustrated and impatient, sells their position for a large realized loss.
So how do you overcome such situations? Well, the first thing is to make sure you stick to your trading rules (see above). Second, remember that the market is right, and you are wrong. If a stock is not performing exactly how you planned it, exit your position immediately (also see above).
And finally, but equally importantly, if you do find yourself in such a position, DO NOT PANIC. Always watch the price action carefully, intra-day, inter-day, or whatever your trading timeframe might be. All spikes (or plunges) have a moment of pause and retracement. They have to, because profitable traders are taking profits, thereby selling (or buying back) and putting downwards (or upwards) pressure on the stock. If the stock is like the majority of penny stocks, smart short sellers are then entering the trade as the momentum fades and price action is weakening (on a price spike), or buying back on a plunge. Wait for these moments to exit your losing trade.
If the spike in the stock is a result of news, always remember that almost all penny stocks are worthless dogs. Remember that almost all news is released in order to push up the price of the stock in order for the company to meet listing requirements, for management to sell their shares, or to raise funds through a dilutive financing. Do your homework on all news that is released. Many times such news is old and is simply a re-release, and therefore any actual value to the company that the news event creates has already been priced into the stock.
Of course, spikes (plunges) can continue for longer than anyone thinks they can. This is where experience comes in. And this is why it is essential that anyone new to trading must trade with a paper account, and/or, trade conservatively and with small dollar amounts to begin with.
Ultimately, panic is your enemy. Avoid it at all cost. Have the confidence to avoid following the crowd. Remember, more than 90% of the crowd is wrong.
Revenge is a Dish Best Served Cold
Every trader I know, have taught, and have worked with, has experienced a sizeable loss. Believing they were right (and that the stock turned on them), they seek revenge by making the exact same trade on the same stock soon after they take their loss. This is a classic mistake made by almost all inexperienced traders, and another primary reason they end up failing.
If you remember that golden rule that the market is always right, and you stick to your well defined trading rules, you will avoid this situation. Once a stock no longer meets your criteria for a reliable setup (which it would not because you have already lost money on the trade), forget about it. Move on to the next stock.
Never seek to enact revenge for a loss. Only a trader with an oversized (and unjustified) ego will do so.