Trading Penny Stocks: What Volume Can Tell You

This post is actually a continuation of the post-before-last on trading penny stocks (the one where the title says “Not Nearly as Hard as You Think”). I had explained that there were two basic things to look for when you’re looking to buy a penny stock—one being the sluggish price action in a tight trading range, as exemplified by the chart for AFT in my previous post, but I broke my train of thought (due to having to attend to some personal business) so I never gave you the second thing to look for when evaluating a potential penny stock to invest in. I want to go ahead with this post and pick up where I left off.

Volume is a very important indicator when determining whether or not a penny stock is poised for takeoff. Most stock charts will by default have volume listed underneath the actual price chart, so it’s pretty much a given as far as chart reading is concerned. When you evaluate volume for penny stocks, remember that the average daily volume will usually be higher the lower the stock price goes, due to the fact that a million shares of a one-cent stock doesn’t carry as much weight as a million shares of a blue chip stock. A big day on the average OTCBB stock will see shares traded into the hundreds of millions—an unusually high amount for a blue chip stock, such as Google. The basic point is that it’s all relative.

So what can volume tell you as far as whether or not to buy a particular penny stock? Again, without sounding like a broken record, volume is one of the key indicators as to how the “smart money” is snapping up shares of a penny stock. When you see light volume and a tight trading range, you can count on it; there’s a setup being made for a move up in prices, in relatively short order. This narrow price range may last for a month, or even months, and sometimes years at a time. Keep in mind that the longer the time period is, the more solid the move up will be, and the more percentage gain you can expect out of it. Think about it: When architects & engineers are designing an 80-story skyscraper, they don’t build it with a 5-foot-deep foundation. The higher up the building will be, the more deep they have to dig to set a solid foundation for the structure to stand on. The same principle applies here with volume; the more the price just snakes along in that little trading range, with very quiet price action and very quiet volume (i.e., no violent spikes), the more likely it is that a good, solid move up is being formulated, as the strong hands are quietly gathering up shares over time, little by little, with the sole purpose of dumping them en masse to the unsuspecting public once the time is right for the stock to look “good” in the eyes of the public.

I know these things may sound a little like a “conspiracy theory” type of thing, but it’s absolutely true. The very fact that stock analysts & market commentators talk about whether the “public is in the market or not” proves that there are other players involved besides the public. As the old Wall Street axiom has already stated, “The public is always wrong.” This could never be truer than in the largest casino of all, the network of stock exchanges that operate on Wall Street.

So how does all of this fully “fit” when it comes to buying penny stocks? Use it to your advantage; recognize the role that quiet volume plays over a good period of time, and keep a close eye on the penny stocks that display this type of action. When their price charts look the most “uneventful”, that’s usually when the main event is about to begin.