Learning how to trade penny stocks has become more popular over the years. While penny stocks are attractive to investors because they offer the potential for a big payout for minimal investment, you also want to understand the risks. Learn more about penny stock trends that you will want to look for so you can make informed choices about trading penny stocks.
What Is a Penny Stock?
The U.S. Securities and Exchange Commission (SEC) classifies a penny stock as any security trading under $5 a share. Publicly traded companies currently issue around 18,000 penny stocks, and your goal is to find the lucrative stocks. Typically, companies that issue penny stocks are new, have no established track record, and have a small market capitalization. As a result, penny stocks are considered speculative investments. While they’re not all valuable, you do have the potential to make money with penny stocks.
Use Candlestick Charts to Evaluate Penny Stocks
To make a profit trading penny stocks, you need to know how to identify trends. Penny stocks are usually evaluated using one of two charts. The first chart you can use is the candlestick chart. Each candlestick chart has four data points you need to consider. The first two data points are the open and close prices, which represent the top and bottom of the candlestick. The other two data points are the high and low prices, which represent the top and bottom of the candlewick.
You can use the color of the candle to help you determine whether a penny stock is moving up or down. For example, red indicates a fall in prices, while black, blue, green, or another color will typically indicate a rise in prices.
Use Line Graphs to Evaluate Penny Stocks
The other type of chart you can use to evaluate penny stocks is a line graph. The main advantage of the line graph is that it clears away the clutter and offers a simplified view of the trends. Most line charts typically focus on the opening and closing price of the penny stock.
Look at Chart Patterns
Once you know the type of charts you can use to evaluate penny stocks, you need to understand the chart patterns to look for so that you can learn how to trade penny stocks. First, consider the distinctive chart patterns. One example of a distinctive pattern is the head and shoulders. This pattern occurs when a stock price rises and falls three times, and the middle peak, which is considered the head, is the highest of all three. Usually, when this trend completes and comes down from the second shoulder, it continues to fall.
You’ll also want to consider the technical patterns. An example of a technical pattern is topping out, which is when a share climbs steadily for a long period of time before leveling off. When you see a stock topping off, it’s a good time to sell before the price falls.
Explore the infographic to learn more about properly reading and evaluating charts and penny stock trends so that you can get started with trading penny stocks today.