Every trader has their own preferences when trading. Trading penny stocks tends to involve a lot of technical analysis rather than fundamental analysis. Penny stock technical analysis revolves around chart patterns and indicators. Here are some of my preferred penny stock chart patterns and indicators:
Support and Resistance Penny Stock Chart Pattern
Support and resistance lines are essential for any trader. They help investors identify points of historical strength and weakness. This is significant because it allows traders to find the opportune time to get in and out of stocks.
Support lines are drawn when a stock bounces off of a certain price; let’s say $1. If the stock approaches this $1 line again, traders will look for a bounce off of that $1 support line and a move upward. If a penny stock does bounce, the support will be seen as a stronger support line. In comparison, if a stock has a $2 resistance line, this means that a stock has a hard time breaking $2.
When using support and resistance lines you must always understand that if support is broken it becomes resistance. The same applies to when resistance is broken, it becomes support.
Bull Flag Penny Stock Chart Pattern
When trading penny stocks, it is very important to see consolidation and continuation. Bull flag patterns occur when there is a strong move upwards generally in 1-3 green candles. The stock then consolidates having lower highs but constant lows forming a flag.
Like any other significant price movement, the volume must be present. If a bull flag forms on little volume, it will be more difficult for the stock to break out. Usually, if a breakout occurs the trend will continue up until sellers step in.
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Double Bottom Penny Stock Chart Pattern
As important as continuation patterns are, reversal patterns can be just as fruitful for investors. A double bottom penny stock chart pattern occurs when the price of a stock reaches the same low two times and then rallies back up. It usually looks like a “W” on a stock chart.
Investors ideally want to enter their positions when the stock bounces back after reaching the second low. In addition, traders will keep watch on how the stock trades over the next few days to confirm an uptrend.
Golden Cross Penny Stock Chart Pattern
Although it is a lagging indicator, the golden cross is one of the most sought-after indicators. A lagging indicator confirms trends and does not predict them. This is because they use past price action instead of the current action. A golden cross occurs when the 50-day simple moving average crosses over the 200-day moving average.
This is considered very bullish and a sign for a strong uptrend. Traders utilizing the golden cross usually make positions for longer-term trades. Furthermore, seasoned traders will look for additional confirmation along with the golden cross so solidify their decision to buy penny stocks.
Fibonacci Retracement Penny Stock Chart Pattern
This trading strategy is a little more complex than the others discussed. This strategy should be used in conjunction with other chart patterns like a bullish flag. I tend to use Fibonacci retracements when day trading penny stocks. Usually, you draw it from the previous day’s close to the high of the day.
In Layman’s Terms, there are multiple levels that could act as support: 23.6, 38.2 and 50%. If you use those levels with moving averages, you could find good potential entry points for buying penny stocks. Because more and more traders utilize Fibonacci lines, they have become a sort of self-fulfilling prophecy for traders.