How to Use Technical Indicators to Spot Penny Stock Trading Opportunities - dummies

How to Use Technical Indicators to Spot Penny Stock Trading Opportunities

By Peter Leeds

Technical analysis (TA) is the study of the trading chart. Using technical indicators can help you spot penny stock trading opportunities. In its pure form, TA eliminates all consideration of the actual underlying company and its operations. TA can be used on its own or with a solid fundamental research review, but either way, when you apply TA, the trading chart is your best friend.

Before getting familiar with the individual TA indicators, and before you look for and apply them, you should first gain an understanding of how TA helps you spot future directions of prices and, therefore, trading opportunities.

Specific patterns on a trading chart imply certain actions in the share price. For example, a consolidation pattern suggests that the shares are about to spike higher. So you will either notice a pattern in the chart of a penny stock you already own, or you will look through (potentially) hundreds of charts and act on any optimistic patterns you find.

After you know about the major TA patterns, you can apply them to your trading in a number of ways:

  • Sift through hundreds of charts. You will no doubt have your favorite TA patterns (which will generally be the ones that help you make the most profitable trades). Use a stock screener and a charting website to go through the charts one by one, looking for patterns with positive implications.

  • Study the chart of a stock you already own. You gain lots of information about your current holdings by reviewing the trading chart. Maybe the patterns suggest that you sell, or imply you should buy more before a big run-up. The chart you hold could have both good and bad indicators; when you feel familiar with the patterns and know what to look for, trading decisions will be clear.

  • Choose between companies. Whether you’re deciding between two or more companies from a peer group or from vastly different industries, TA can often solidify your final decision. This is especially true when conventional due diligence still leaves you sitting on the fence about which stocks to purchase.

  • Know when to sell. This is one of the top questions from new investors. TA can help you make or solidify your choice to sell and will help you with the timing and the price.

  • Watch the progress of your purchase. By keeping an eye on the trading chart, you get an idea if your penny stock is moving in the right direction.

  • Spot buy opportunities. If you’ve wanted to get involved with a specific penny stock, and TA shows that a current price dip will be temporary, it may be a great time to purchase.

TA is an important part of most investing, and for some traders it is the only part. Decide for yourself how and when to use it, and adjust your TA approach as you gain understanding and see some results.