Penny Stocks Defined

In many ways choosing good penny stocks is a more complex skill than working with large cap stocks on the big exchanges. There is often limited information to work with and there can be uncertainty with certain companies. However, there are certain things that successful traders have learned to look for in a solid penny stock, and those include liquidity, press releases, technical indicators, and other chart techniques.

Liquidity

One issue with the penny stock market is that liquidity is often a challenge. Since there is no formal exchange to trade on, it is difficult to know for sure that there will be a buyer or seller when you see an opportunity to take a position. Check penny stock communities online, talk to other traders, ask your broker or several brokers if there is any buzz about the particular stock. These sources will give you an idea of whether there has been any significant volume of trading for the stock that is likely to continue. Keep in mind that it will often not be the case with these small cap stocks, but when you find a relatively liquid one it is certainly a good sign.

Positive Press Releases

Since the information regarding companies behind penny stocks is limited compared to index listed companies, the press releases a company puts out are often a key information source and can swing the price of a stock. Look for patterns of positive events in the business development of the company through these press releases, such as growing sales, development of new products, possible acquisition news, and more. These press releases will often coincide with a significant upswing in the stock’s price.

Technical Indicators

There is a vast array of technical indicators that can be used to analyze the direction a stock is trending in. Learn the basics of moving averages and their crosses, and build from there. The more technical indicators you learn, the more angles you have to test against each other when analyzing a potential buy. Some other popular technicals include stochastic oscillators, MACD, RSI, and Bollinger Bands. Technical indicators are often used in combination to confirm a good stock pick once a buy signal is triggered.

Charts

In addition to technical indicators, there are many positives you can determine from the price chart itself, without further manipulation of the data. Learn common patterns to pick out and get an idea of what a chart will do. A predictable rolling pattern will often develop, and triangle chart patterns can tell you whether sellers are overpowering buyers or vice versa. When you see a chart pointing towards bullish price action, you know you are looking at a potential buy.

Success in the penny stock market is determined based on such small price moves that it is important for traders to use a multifaceted approach to their analysis. The better you get at using these tools, the earlier you will be able to spot trends to take advantage of, and your bottom line will be better off for it.