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Small cap stocks, bulletin board equities, penny stocks ” call them whatever you want. Many of them hold the promise of great fortune. The challenge for investors is distinguishing the winners and losers, and then maximizing that promise. Its not an impossible task though not in the least.

Theres no such thing as an investor acquiring too much knowledge for his or here own good, but this five-pronged strategy may be effective just because of its simplicity.

First, the very best small cap traders tend to at least do one important task very well ” they can differentiate a short-term trade and a long-term investment. Mechanically both trades may start and end the same way. Mixing and matching the underlying philosophies, however, often leads to frustration.

Secondly, micro cap trading requires becoming comfortable with volatility you may not experience with most large cap stocks. Funds and institutions can buy a substantial amount of a big company like General Electric (GE) or Microsoft (MSFT), and the purchase may not even create a blip on the stocks chart. If a fund or a large number of investors buy or sell the same dollar amount of a micro cap company though, it could mean the entire float gets pushed around. Thats not a bad thing though, if youre on the right side of the action.

Third, successful penny stock traders focus as much on charts as they do on the stocks perceived value. Sometimes these stocks trade at appropriate values. However, just because theyre undervalued or overvalued doesnt mean theyre going to rally or sink. Reading charts will help time optimal entries and exits of stock picks that are based on fundamentals.

Fourth, penny stock traders absolutely must understand these stocks generally trade based on future potential. Fortunes have been made with micro cap stocks even before the underlying company made its first dime. In other words, this is something of a psychology contest; since other traders also speculate with the same small stocks, you must also outguess their entry and exit strategies.

The fifth idea is just simple advice ” know when to take profits. The fear of missing out inspires micro cap speculators to stick with a compelling company. The problem is, this hope-based affinity for a stock can cloud a traders judgment. If a stock turns out to be a winner after profits were already taken on it, just buy the stock again at a later date. Too many traders forego the bird in the hand only to later give up the two in the bush as well.

Its not really that complicated, is it? These are just five simple ideas, yet five very powerful ideas. Their simplicity may surprise a lot of traders, in fact (new-comers in particular). Adding layers and layers of modeling and analysis should translate into better small cap picks, but all that analysis can obscure the most important basic ideas like these.

The point is, lots of traders are reaping huge rewards with penny stocks. You can be one of them with just a little bit of focus.