Do You Know When To Buy Penny Stocks Or When To Sell?
Knowing the basics of penny stocks is important especially if you’re looking to make money with these cheap stocks. But it’s also important to know how long you should hold penny stocks. So, if you’re new to this market, it’s likely you want to know everything possible in order to profit. Two of the most important things to know is when to buy penny stocks and when to sell them. These two simple actions are the most important because it’s at these moments that you seal your fate.
When looking for penny stocks to buy, you’ll need to first have a strategy in place. Are you looking to buy based on momentum? Are you following a developing economic story? Is there a sector catalyst that could trigger a big move for certain stocks? These are just a few questions to have answers for, prior to placing any trade.
If there was a way to quickly reference certain criteria and then check all stocks against that criteria, your job of picking penny stocks would be that much easier. Though there is no one failsafe scanner, there are certain things you can do to filter out the noise and bring you to a better rate of success.
Penny Stocks And Market Cycles
Unlike most blue-chip stocks, penny stocks generally don’t follow cyclical trends. So it may be more difficult to know how long you should hold penny stocks. But don’t be disheartened by this. Sectors, however, will go through cycles and as the saying goes, “a rising tide can lift all ships.” This references the idea that if a positive, sector-wide event happens, there’s a good chance that most stocks within that sector will follow the trend.
When it comes to penny stocks, even a small rise in price can equate to serious percentage-point gains. Let’s take an example from a popular sector like cannabis. Typically, when there’s a sector-wide event such as a market-leading company reporting strong earnings, most industry stocks jump to some degree. When it comes to marijuana penny stocks, the volatility paired with the favorable sentiment has created some serious breakouts.
Just think it wasn’t that long ago where companies like Canopy Growth (CGC Stock Report) and Cronos Group (CRON Stock Report) were well-established pot penny stocks. So every time I read some post or article about how penny stocks are bad, I can easily reference plenty of examples like these, which suggest otherwise.
Know How To Manage Risk
It doesn’t matter what company you look at, penny stocks will always reach a “top”. The period to follow will either be a total breakdown or a period of consolidation. A breakdown will see the stock topple like a ton of bricks. Consolidation, however, is a bit different.
Though the stock will inevitably pull back, that “pullback” will be to a level lower than “the top” but most likely higher than its previous highs. This is where savvy traders will look for signs of a new support. In the article, “How To Make Money With Penny Stocks,” different trends like this are covered. So, take a look when you can.
Needless to say, it’s good to pay attention to certain indicators. At the very least, keep track of indicators that show “overbought” or “oversold” levels. The RSI indicator is a good, basic tool to do so. While this is a very simplistic overview of one piece of a much more advanced discussion, overbought and oversold can clue traders into potential directional moves.
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In general, “oversold” shares have a good chance at moving higher in weeks or months to follow. The “overbought” shares typically fall in price. But then again, when it comes to penny stocks, there are other factors to keep track of.
A Closer Look At RSI for Penny Stocks
Again, this is just one of many different indicators to monitor when looking for penny stocks to buy. The RSI or “Relative Strength Index” analysis momentum in a range of measurement from 0 to 100. Typically, a range of 0 to 30 indicates an “oversold” level. On the flip side, 70-100 suggests a level that is “overbought”.
As I said, RSI isn’t and shouldn’t be the only indicator you look at. But it is a good one to use when it comes to putting together your initial list of penny stocks. Think of it as a way to monitor demand. Personally, if I see RSI above 85, it’s a signal that a given penny stock may be a bit “too hot”. I could be completely wrong but then again, instead of focusing on that “hot penny stock,” I could look for plenty of other stocks that are just beginning to heat up.
There are plenty of times where penny stocks with overbought RSI’s continue higher. And since this indicator is an oscillator, it will update each day. This means if the penny stock was showing an RSI of 80 one day, the RSI may show 75 by the end of the week even if the penny stock is still trending higher. This is another aspect to keep in mind when using RSI and why I say to not just rely on this indicator alone.
Penny Stock RSI & When It Matters
Likewise, if you own a stock and the price increases, RSI is a good indicator to keep track of. If you’ve bought a penny stock when the RSI was around 50 and then it climbs to 75 or 80, this may be something to note. Though it isn’t generally an all-out signal to sell, it is a signal saying, “Hey pay attention to me.” This can help you know how long you should hold penny stocks.
Basically, it’s a signal to you as a trader that it’s time to consider protecting your profit. Similarly, if you are invested in a penny stock and don’t necessarily care about the short-term ups and downs an RSI of 25 or lower may be another time of “Hey pay attention to me.” This time it might suggest that a certain penny stock is oversold and could be ready for a rebound; therefore showing potentially undervalued price levels.
Other Indicators For Penny Stocks
The RSI indicator is just one of many other penny stock trading-indicators you can use. However, it’s important to understand that indicators aren’t everything. Some people don’t even use indicators. When it comes to figuring out when to buy penny stocks and when to sell, I find it helpful.
But that’s my personal opinion. Indicators give me somewhat of an alert that says it’s time to keep this one on my screen because it might be time to take action. Indicators can be a good fit for anyone’s trading toolbox.
Other indicators to know about at a basic level include:
MACD or Moving Average Convergence/Divergence
This indicator monitors the change in strength, momentum, direction, and duration of a given penny stock’s trend. It’s calculated by taking away the 26-period exponential moving average from the 12-period exponential moving average.
This may sound like a foreign language if you’re just learning about penny stock technical indicators. Basically, the MACD will help investors understand if a trend is bullish or bearish and how strong that trend may be.
Think of this as an advanced support/resistance indicator. I say this because Bollinger Bands can help show the upper and lower limits of a given penny stock. The further benefit of the “Bolli’s” is that the indicator plots out the widening or narrowing upper and lower levels during specific trends.
Essentially if the Bollinger Bands are tight, the given stock is likely trading in a very tight trend and the market is relatively quiet. If the bands are wide, the market is volatile and the upper and lower Bollinger Bands can be a better plot of potential support and resistance.
This indicator is similar to RSI. It shows potential levels of a stock being “overbought” or “oversold.” The difference comes into play depending on certain markets. For example, if a “trending market” is in play (meaning a stock is clearly moving in a certain direction) RSI may be the better indicator to watch. With a sideways market where a stock isn’t in a clear trend, Stochastics may be the better indicator. But again, don’t rely solely on one single indicator.
How Long Should You Hold Penny Stocks?
When it comes to buying penny stocks or selling penny stocks the ultimate choice is yours. However, there are a few tools you can use along the way to help you determine if it’s time to buy more or sell out completely. Just know that indicators are not foolproof nor should they be the only thing you watch. This is especially true when it comes to knowing how long should you hold penny stocks.
If a penny stock is on the rise and all indicators are at levels suggesting it could go higher but then the company reports terrible news, the indicator side of this equation is out the window. At the end of the day, manage your risk accordingly, take profit when possible and most importantly, don’t get greedy.