Using Support And Resistance With Penny Stocks
Support And Resistance Levels With Penny Stocks
One of the most important tools available when trading penny stocks is the use of support and resistance. Support and Resistance is the basis of most technical analysis chart patterns and are two of the most widely used technical indicators in trading and investing, largely due to their ease of use and relevance. Support and resistance is based on the concept in technical analysis that the price of a stock will reverse at certain predetermined price levels, usually in areas where the stock has reversed directly previously.
Support and resistance lines can give penny stock traders valuable clues about the possible future price movement of a stock and establish a trading range. Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. Once a trading range has been established, it is possible to trade in and out of one penny stock over a long period of time, often buying the penny stock when it reaches established support and selling once the penny stock reaches established resistance. After selling, it may take a few weeks or months for the stock to return to support levels before re-entry and repeating the process.
Another term for a trading range is a channel. Most stocks trade within a channel, or a narrow band of support and resistance. Usually for a penny stock to break out of this channel, requires a significant event. Often a breakout from an established trading range can be the result of good news or more than expected revenues announced by the company, resulting in more investors purchasing shares and pushing the price upwards.
Once this happens and the stock breaks through established resistance, the established resistance line becomes new support for the penny stock. Many times this scenario can be best described as a bouncing ball breaking through a ceiling with the ceiling now becoming the floor on the next level. This process also works in reverse. If the company releases news that earnings are less than expected or a contract was lost with a vital customer, investors will head for the exits applying selling pressure on the stock price. Where established support once existed, now support has become the new resistance line. A new support level for the stock must be established. Support and resistance is like a floor and a ceiling, with prices sandwiched between them.
Used alone, support and resistance levels can be a powerful indicator when trying to establish entry and exit points. Coupled with other indicators, the power of support and resistance levels only increases this potential. To be successful at penny stock trading, a trader must use time and study to establish a trading system that works and is profitable. Using support and resistance levels will enhance any trading system and increase your chances of being successful in trading penny stocks.
Using Speculation To Invest In Penny Stocks
Many people are attracted to the stock market, as they should be for investment purposes. The stock market has always been a valid option for people to build a retirement fund or a nest egg over time, provided they are savvy enough to pick the correct stock or fund. Many times, there is not enough time to devote to financial planning so a reputable financial planner is enlisted for guidance. This scenario is the usual way people approach the stock market, however, speculation is another way people use the stock market to make money.
Speculation comes in many forms with the stock market, usually by people that have enough disposable income to absorb a loss. Futures trading or commodity trading is one form of highly speculative investing or trading. Another is option trading. Stock options are derivatives that get their value from the underlying stock and can be highly speculative as they can expire worthless in a given period of time, unlike stocks. One good thing about stock options, the amount of money a person can lose is the amount spent on the options, unlike short selling, which can become extreme losses if a person is on the wrong side of the trade.
Another form of speculation is penny stock trading. Penny stocks, as tradition states, are any stock that trades below five dollars. However, for the purpose of this article, any stock trading below one dollar is a true penny stock. Many people are attracted to penny stocks because of their low price and the amount of shares that can be purchased for less money than larger stocks. One major drawback of penny stocks is that they are thinly traded and can go weeks or months without a single trade being executed by market makers. Usually the companies trading on penny stock exchanges are smaller companies with little or no cash, or shell companies with no viable business operating within the shell.
Penny stocks are wrought with fraud in some cases as unscrupulous characters tout these thinly trade stocks over the Internet or newsletters, selling their shares into penny investors as the share price increases. However, this is not always the case. There are viable start up companies trading on the penny stock exchanges that have a sound business plan with exciting futures, but little cash. When penny stock investors are fortunate enough to invest in one of these companies, gains in the stock price can be one thousand percent or better.
Speculation in penny stocks unfortunately is mostly done by people with little cash available for speculation and are unable to withstand the loss. Attracted to the inexpensive cost of these stocks, speculators more time than not, lose their investment and in some cases average down by purchasing more stock as the share price tumbles with the hope that the stock will return to previous highs. In some cases the penny stock investor does realize gains after averaging down, but this is not the norm.
Penny stock investing should be approached with caution and proper research should be done before buying equity in the company. Diamonds in the rough are out there trading on the penny stock exchanges, but honest research and a critical thinking should be applied before deciding to become a shareholder in a smallcap company. Due diligence is key to making informed decisions when considering a penny stock company.
Penny Stocks And Bollinger Bands
Trading penny stocks can be a very lucrative form of trading if certain guidelines are met. One of those guidelines is having the proper tools to evaluate and chose winning penny stocks. Charting software is an important component of a trading system and within the charting software there are various indicators that a person can use when considering a penny stock investment. This article will cover one of those indicators, Bollinger Bands.
Developed by John Bollinger, Bollinger Bands are an indicator that allows traders and investors to compare volatility and relative price levels over a designated time period, a relative high or low in the instrument being traded. Two important factors are derived from the Bollinger Bands which are bandwidth, a relative measure of the width of the bands from each other, and a measure of where the last price is in relation to the bands. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the low or high of the price relative to previous trades, indicated on the underlying chart.
Since their introduction, few indicators have helped traders as consistently as Bollinger Bands and the use of Bollinger Bands varies distinctly among traders. The use of Bollinger Bands is not confined strictly to stock traders, options traders often sell options when Bollinger Bands are far apart or buy options when the Bollinger Bands are close together, in both instances, expecting volatility to return back to the average volatility level for the stock or option.
Closing prices are the prices that are most often used to calculate Bollinger Bands. In addition to identifying volatility and relative price levels, Bollinger Bands can be combined with price action and other indicators to generate signals helping identify potential significant moves. By themselves, Bollinger Bands have two main functions which are to identify periods of low and high volatility as well as to identify time periods when prices are at unsustainable and extreme levels. Bollinger Bands do not give absolute buy and sell signals, and most traders agree that the bands indicate if price is at a relative high or low.
Many traders utilize Bollinger bands to determine the volatility of a stock movement and identify the time frame when the current trend of a simple moving average may be coming to an end. If the two Bollinger bands violently move apart and start moving in opposite directions, the stock has made a significant move. Of course this depends on what time frame the chart is being used. A one minute chart, for example, would not be considered an extreme move with Bollinger Bands. However, a 15 minute chart or daily chart with wide bands surrounding the candlestick would be considered a significant move. It should also be noted, when price is trading near the lower or upper Bollinger band line, there is a possibility that the current trend may be reversing. In other words, when price reaches these extremes they should be considered overbought and oversold.
Over the past twenty five years, traders have considered Bollinger Bands to be the most important and reliable tool for determining expected price action, with almost all trading software platforms including Bollinger bands as one of the primary indicators. Used in conjunction with other indicators, Bollinger Bands can be a powerful indicator to implement into a system designed for trading penny stocks.