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What You Should Know about Momentum Indicators and Penny Stocks

To determine a stock’s momentum, compare the current price of a penny stock to its value on a previous date. For example, if you set the momentum indicator to 12 days, momentum will show as the difference between the current day’s share price compared to the share price 12 days prior.

Momentum is typically displayed across the bottom of the trading chart as a line that rises and falls. This indicator can help investors make buy and sell decisions in penny stocks with greater clarity when used to identify

  • New price trends: When the momentum indicator turns higher from a bottom, the trend may imply a good buying opportunity. When the indicator starts dropping from a peak, it suggests selling the underlying shares.

  • Trend changes or reversals: If the momentum indicator drops sharply but then starts climbing (before prices do), it could imply a bottom in shares price and the beginning of a brand-new uptrend. When the indicator spikes but then starts sinking (before prices sink), it may signify a top in the underlying share price.

Each technical analysis investor needs to decide what time frame works best for them. While by no means an indicator with perfect accuracy, it can provide investors in penny stocks with a great deal of clarity for their trading decisions.

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