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Penny Stock Technical Trading

Jan 24, 2008
Technical Trading is a strategy incorporating Technical Analysis (TA) as the primary means of identifying stocks of trading interest, as well as entry and exit points. The technical trader uses charts to examine the trading history of a stock, observe indicators, and identify price patterns and trends. Being a topic which can not be accurately summed up in one page, or even a pile of books, we will only be summarizing technical trading here. To do this we will list and identify the major technical indicator groups and means of analysis:

1. Strength Indicators/Oscillators - are indicators that compare current price action to that of history, showing the relative strength or weakness of a stock. One of the most common of these is the RSI (Relative Strength Indicator). Often shown at the top of a chart, the RSI can indicate overbought and oversold price conditions, providing a tip for traders to buy or sell a stock.

2. Moving Averages - or MA's for short, are trend indicators generated by averaging historical price levels over a certain period of time. These can be used to identify short term price movements above or below long term price averages, also known as crossovers. Crossovers can indicate possible breakouts, or breakdowns, making them an important tool for a trader. Some crossovers hold more weight than others, such as a "Golden Cross". With a self explanatory name, a golden cross is identified by a short term MA crossing bullishly through a long term MA. Often used are the 20/50, 50/100, or 50/200. Each number represents the period with which the MA is calculated. The opposite of the Golden Cross is known as the "Death Cross".

3. Pattern Analysis - is the evaluation of the stock chart to identify price formations, or shapes such as triangles, wedges, the head and shoulders, cup and handle, etc. These formations can indicate potential upward or downward movement in the future. They are generally caused by pure market forces, but the occurrence of one, natural or not, often affects trading and price action. With that said, manipulation can occur in attempt to "draw the chart" and create a favorable movement for someone, or some group of people.

4. Range Analysis - is the use of price range, and opening and closing prices to identify support and resistance levels. These can be very valuable in determining the best buy and sell points, and potential breakout/breakdown levels.

5. Gap Analysis - is done by finding gaps in the daily, weekly, or even intraday charts. A gap is an open spot in the chart caused by an opening price and range that is greater than the previous period's close. The general consensus is that gaps are usually filled. In the case of penny stocks, they almost always do, unless the company proves real success that sustains the price movement. One can use gaps to determine buy prices, or re-entry targets, knowing that the price is likely to return and fill the gap before moving much higher.

After identifying an attractive stock to trade with technical analysis, the actual buying, selling, and holding of that stock should be augmented using other methods. One should always use Level 2 quotes to refine buying and selling decisions. News and filings should also be monitored to protect your investment from fundamental changes.

Technical Trading Pros:
-There are lots of technical traders out there on stock trading forums and boards that are very helpful identifying technically hot stocks, as well as helping you learn TA.
-Technical moves can be quite strong with penny stocks, often because TA is all there is to judge a penny stock and its price movements.

Technical Trading Cons:
-Pumpers and bashers can make almost any chart look technically positive or negative, luring inexperienced investors into buying, holding, or selling.
-Without attention to fundamentals such as news and filings, an attractive technical trade can be turned upside down in a matter of minutes.
-TA is extremely complex, mathematical, and difficult to comprehend.
About the Author
TheThirdDimension.net is your one stop site for Penny Stock Investing resources. Tips, tools, strategies and resources; We have it all. Learn how to Trade Penny Stocks at TheThirdDimension.net today!
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