For most traders, investing in penny stocks is one of the best ways to step into the world of investment. Because penny stocks trade at less than $1 per share, allowing investors to buy substantial volumes of shares using very little capital. When using Technical Analysis is even better.
As a result, most of these investors undertake fundamental analysis to establish the strengths of operations of the various companies trading penny stocks. However, if you decide to invest in penny stocks, you must undertake penny stock technical analysis.
To enable you to find out the various trading opportunities by monitoring the changing price patterns in the penny stock market.
This article provides you with a technical analysis guide for penny stock trading.
What is Penny Stocks Technical Analysis?
A technique of examining and forecasting price trends by studying market statistics, price charts, and graphs. Technical analysis (TA) of penny stocks get based on the argument that an examination of historical market patterns enables investors to make accurate predictions on the future movement of stock prices.
When properly executed, the technical analysis offers more excellent benefits to the investor compared to the fundamental-based examination of stocks. The good thing with TA is that you can easily access the analysis tools through the leading online brokers.
Terms Used in the Technical Analysis of Penny Stocks
The primary objective of the TA is to identify and monitor the changing trends in penny stock prices. About these trends, the following terms get used.
• Moving Averages
These are the price averages of a penny stock calculated over a series of periods every day. The prices of penny stocks change daily, making moving price averages an ideal way to predict future stock rates accurately.
• Price Action
A technique used by investors to make trading decisions based on the actual or recent movements in stock prices. Rather than depending on other technical indicators only. Short term investors mostly use this strategic tool.
• Upside Trend
An uptrend is about a progressive growth in the prices shares of penny stock investments.
• Downward Trend
The downward trend is the progressive decline in the penny stock prices.
• Sideways Trend
In referring to a market situation where there are no changes in the movement of stock prices. Following an equal measure in the demand and supply of penny stocks.
What is the Ultimate Technical Analysis for Penny Stocks Investment?
At the end of a technical examination of penny stock prices, investors should be able to make informed decisions on the right price for buying and selling given securities. Here are TA patterns that investors should observe for conclusive investment decisions.
1. Bottoming Out Pattern
About a pattern where stocks move from a downward trend to a sustained upward trend after a recent sideways trend. Often, penny stocks that display this pattern offer the best long-term returns.
2. Topping Out Pattern
Where stocks that have experienced an upward trend begin to have their prices level off, then the stocks are said to be topping out.
Often, these prices get expected to fall in the long run, forcing most investors to sell out their stocks. Most of these traders lose money in significant amounts.
A pattern where stocks trade at a lower or higher price than the previous day’s closing price without any trading activity. Some technical analysts will initiate trade after the occurrence of gapping.
4. Price Dips
A situation where stock prices have been rising steadily on price experience a small move downward. Making a move at the right time can see your profit significantly from such penny stocks.
5. Contrarian Trading
Contrarian trading refers to a move by investors to trade against the trend. A contrarian trader buys stocks when their prices drop and sells them when the markets recover.
Contrarian trading gets based on the argument that stocks with the best prices before a fall in the market offer the best returns when the market recovers.
What are the Benefits of Technical Analysis?
Notably, stocks trading in OTC markets are not regulated, allowing investors to undertake TA independently to monitor price movements for informed investment decisions. As a result, investors enjoy numerous benefits that include and are not limited to the following;
- The minimized investment exposure by initiating short-term trading based on TA.
- An accurate prediction of trading opportunities for penny stocks.
- Saving time and energy required in fundamental stock analysis.
- Easy tracking of price movements for informed decision making.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.