Using Volume To Find Penny Stocks To Buy
The trading volume for penny stocks and blue chip stocks, alike, is essentially how many shares of it have been traded in a certain amount of time. When it comes to the stock market, volume is defined as the amount of shares that have been traded. Pretty simple right? The volume also applies to options and futures. Charts are generally used to track the volume data.
If you identify different volume patterns over time, it can help you get a glimpse of increases and decreases with different stocks and markets. This is the same case for traders of options as it will tell the trader the current interest of the option. Volume is very important for technical analysis. Now, not all penny stocks will follow these to the letter but these are some basics on how to use volume when searching for great opportunities in the market.
How Should You Use Volume To Find Top Penny Stocks
There are a few things you should note to decide the strength of any given trade. Usually, traders will join more strongly performing penny stocks, and not even look at weak ones. Guidelines aren’t always accurate for every situation, but they can put traders on the right path of finding the best penny stocks to buy.
How To Use Volume In Penny Stocks #1: Confirming a Trend
When a penny stock is rising, generally its volume will as well. Numbers increasing and enthusiasm increasing will push prices higher. If there is a price increase but a decrease in volume, then it could possibly be a lack of interest. It could also be a lack of selling pressure as well. This isn’t a bad scenario but it poses certain risks that more active penny stocks may not.
Namely the fact that if interest is drying up, how much longer will the bull trend continue before it reaches exhaustion? That could result in a price reversal which you wouldn’t want to encounter. Basically, a price drop in volume, even with price moving higher is not enough reason to focus on it. A large volume is what traders should look for.
How To Use Volume In Penny Stocks #2: Exhaustion Moves
Exhaustion moves are steep moves in price that align with steep moves in volume. This can signal the end of a trend. Exhaustion moves can apply to a rising or falling market and they’re usually drastic moves. Once traders see an abrupt move like this, it could indicate the end of the underlying trend; bullish or bearish. This is where we see things like a bull trend with slowing volume turn into a bearish sell-off.
On the other hand, a bearish trend with slowing selling volumes could turn into a bullish uptrend, or better yet, a short squeeze. An exhaustion move toward the downside can be opportune for the “buy low, sell high” traders (most traders) because amid the exhaustion move lower, short interest has been building. However, when there isn’t enough selling to keep penny stocks down, buying volume overtakes the market and forces the hand of anyone holding a short position on such a penny stock.
How To Use Volume In Penny Stocks #3: Volume Identifying Bullish Movement
Let’s say the volume increases while a penny stocks’s price declines. However, the price then begins moving higher, and then lower once again. If the lower price isn’t below its low from before and the volume is lower, then it could be a sign of an underlying bullishness in the penny stock. This can often be seen with many stocks under $5.
You can also identify price reversals can also be identified if a stock has heavy price movement or volume. This is usually after a long section of a price moving high or low. Volume Breakouts are important as well. The initial breakout from a chart pattern with an increase of volume could show strength. Less volume or no change in volume means there is a lack of interest.
The historic volume is important as well. Always check recent volume data when looking at different investment options and compare it to the past few weeks, months, or even years depending on your trading or investment approach to penny stocks.
Different Volume Indicators
So what does volume mean in stocks? Here are some volume indicators or formulas that use math and are seen on different charting platforms. Every indicator is different, so you should look for what works best for you.
What Is On Balance Volume?
On Balance Volume, or OBV is a rather simple volume indicator. It can also prove to be very useful. Basically, the volume will be added if the market finishes higher, and vice versa. This will show a running total of which stocks are being collected. It can also show if a price is rising but volume is increasing slower, for example.
What Is Chaikin Money Flow?
Chaikin Money Flow expands volume when a price finishes in the higher or lower section of its daily range. It then gives a value for the strength. If closing prices are in the higher section of their daily range, and volume is increasing then values will be higher and vice versa. Chaikin Money Flow works more as a short term indicator.
What Is Accumulation Distribution?
Accumulation Distribution follows the relationship between price and volume. It is a leading indicator of price and measures divergences between volume and price action. Essentially it signals that a trend is growing weaker or stronger. It can be thought of as an advanced version of On Balance Volume.
Initially, it plots opening and closing prices and compares them to the trading range for a certain period of time. The end result weighs against the volume traded. This isn’t a concrete “must do” but generally speaking a bullish divergence signals a buy signal and a bearish divergence signals a sell signal.
What Is A Volume Oscillator?
When looking at the Volume Oscillator, you’re just plotting this indicator using volume alone. The Oscillator utilizes a 2 moving average system. Essentially, it plots the difference between the fast and slow moving average. As a rule of thumb, if the faster moving average is above the slower, the oscillator will be positive.
If this faster moving average is below the slower moving average, then the oscillator should be negative. An example of a fast moving average might be the 5-day and a slower would be the day-10. Generally speaking, a positive volume oscillator signals a stronger trend. A negative volume oscillator indicates a weaker trend.
Essentially, volume is a great tool when you are looking to study different trends. There are many ways to study volume and giving yourself basic guidelines allows yourself to make better decisions. Whether its blue chip stocks or penny stocks, the volume can be identified at all levels to help you identify opportunities in the stock market. What strategy will you use when identifying volume?