How to Use Trends to Spot Penny Stock Trading Opportunities
When something is in motion, it is more likely to continue in the same direction than any other trajectory. Apply this to your penny stock strategy. This is true in physics, and it is just as true in the stock market. In the market, these motions are called trends.
In terms of probability, shares in a steep downtrend over the last two weeks are most likely to go even farther down today. Shares trending sideways will probably keep going sideways; shares trending higher will probably continue their climb.
As long as the shares maintain their trend, they will move at approximately the same speed. A slow, gradual trend will continue on slowly and gradually. A strong downward trend will continue on a strong downward trajectory.
When a trend shows signs of changing, whether in terms of direction or speed, it may signal that you shouldn’t rely on or trust this particular TA pattern any longer.
You can spot a price trend simply. Draw a straight line on the trading chart over the share price of the stock for the last few weeks or months. Ignore temporary price spikes or dips. If your price trend is angling upward, the stock is experiencing an uptrend. If the line is flat, you’ve found a neutral trend; a downward trend will show a downward line on the trading chart.
Based on this approach, an unusual or sudden price move isn’t a trend. Price jumps and collapses, or strange share price activity that’s out of the norm for the time frame that you’re looking at, shouldn’t be considered a trend.
If you have trouble identifying the price trend, there may not be one to be found. Alternatively, try adjusting the time frame that you’re looking at, either longer or shorter term. For example, sometimes you won’t see the price trend if you’re looking at a yearlong trading chart, but a month-long chart may reveal a trend much more clearly.
With the concept of trends alone, you can pretty accurately predict future share price movements if you follow these three steps:
Spot or identify a price trend.
If the trend over the last weeks or months is going up, shares have a high probability of moving higher. If the trend is going down or sideways, you’re most likely to see downward or sideways price activity.
Position yourself to benefit from the trend.
Generally, you want to buy shares that are on an uptrend. As the trend is most likely to continue higher, your investment is most likely to increase in value.
Identify if the trend is breaking down.
Some trends will play out for a short time, and others will last for a long time, perhaps even years. However, they all eventually end. Shares going up will not go higher forever. The moment the trend breaks down, you need to stop relying on it.
Trends are usually in relation to share price. However, trends can also relate to trading volume. For example, if shares of a penny stock continually see greater trading volume from one week to the next, this may represent a trend of increasing volume. This trend would demonstrate increasing investor interest and may forecast higher levels of investor activity and, therefore, higher prices going forward.