Penny stocks are the race cars of the investment world, they move fast, are very exciting, and naturally carry a high risk/reward ratio.
Rule #1: Take profits early!
If you catch a run in a sub penny stock, do not hang around to see how much it will be in a few weeks, the runs in these kinds of stocks are fast and end fast. Take profits as soon as you see them, keep tight stop loss levels and stick to them. Once buying volume dries up on sub penny stocks, they fall back fast, often to lower levels. Do not get stuck holding the bag, get in, get out and do not look back.
Rule #2: Refer to rule #1.
To better understand penny stocks, it helps to know some basic terms such as technical analysis.
The term “technical analysis” or TA may sound complicated, but it is a very basic approach to investing. TA is the study of prices, with charts being the primary too to play penny stocks.
The human element
The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security’s price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans are not easily quantifiable nor predictable. This fact alone will keep any mechanical trading system from working consistently.
Security prices are determined by money managers and home managers, students and strikers, doctors and dog catchers, lawyers and landscapers, and the wealthy and the wanting. This breadth of market participants guarantees an element of unpredictability and excitement.
Bar charts
A bar chart displays a security’s open (if available), high, low, and closing prices. Bar charts are the most popular type of security chart.
As illustrated in the bar chart in below, the top of each vertical bar represents the highest price that the security traded during the period, and the bottom of the bar represents the lowest price that it traded. A closing “tick” is displayed on the right side of the bar to designate the last price that the security traded. If opening prices are available, they are signified by a tick on the left side of the bar. Volume is indicated at the bottom of the chart, it shows how many shares traded at that specific moment and at that price.
Support and Resistance
When looking for a good penny stock play, we look for a nice support level, indicated in blue. If we see the potential for a break out from this support level, the call will be made. As you can see from recent picks, a strong break over resistance levels, shown in red, have resulted in big gains in a short amount of time:
