Trading Penny Stocks Using Technical Analysis

Some people get intimidated if you even mention the phrase “technical analysis” when talking about penny stock trading. Truth be told, there’s really not a whole lot to it, if you resolve to keep things simple. When I have technical analysis in mind, I’m using a more broad definition of the word, so maybe I’m the one with my head in the clouds about it so to speak, because there are some “technical analysis purists” who swear by certain indicators, oscillators, and so forth. Some of these technical indicators include the Relative Strength Index, the Moving Average (whether 30-day, 60-day, or 90-day), the Moving Average Convergence-Divergence (MACD) indicator, the Williams %R ratio, and on and on and on. And I literally mean on and on and on. Some people have so many technical indicators that they monitor with bated breath, that I don’t even know how they ever come to making any kind of trading decision. They observe this moving average, that ratio, this oscillator (I always think of an oscillating fan when I hear that word), that indicator, until in my mind they fall victim to “analysis paralysis”, and the only way they could ever come to a solid trading decision would be if all the planets were in alignment, lightning was striking, AND the Apocalypse all took place simultaneously. While they think they have simplified their trading style due to the fact that they no longer rely on fundamental data (P/E ratio, par value, EBITDA, and so forth), they’re actually still somewhat in bondage to a myriad of figures and data that pretty much keeps them just as confused as if they were making a fundamentals-based decision. In my mind, technical analysis was never meant to be that doggone complicated. When I think of technical analysis, I simply think “chart”. That’s it. All those other squiggly lines and bars and metrics can clutter up your chart and clutter up your mind. You wanna get to the essentials? Use price action and volume. That’s really all you need. I haven’t added one single indicator to my trading analysis, and I’ve done just fine with volume and price action. I’m sure that those other methods may have some merit, but I haven’t really been able to successfully use them, or see any kind of true predictability with them. They seem to work sometimes, and then other times be way off. I know that there are many people who are big fans of William J. O’Neil’s CANSLIM method, and I can honestly say I have never personally tried it, but even on the surface it just seemed like too much to think about for me. Again, in the realm of penny stock trading (as in most other arenas of life as well), the simpler you can keep things, the better off you’ll be.

So what do I mean when I refer to penny stock trading using technical analysis? What do I mean when I refer to chart reading? I mean a clutter-free chart showing you price action over the past 5 years, 1 year, 6 months, 3 months, and then 1 month of a given stock. Each of these charts should have a vertical bar representing daily price action. Each bar represents one day of trading action. I prefer bar charts to line charts or area charts, because I like to see the OHLC (Open, High, Low, and Close) of each trading day. The open price is the small horizontal line jutting out to the left of the bar. The high price is wherever the top of the bar has reached, and the low price is wherever the bottom of the bar has extended. Then, the closing price is the small horizontal line jutting out to the right of the bar. These things say a lot…the chart speaks volumes, once you know how to read it. For instance, if you see a chart where the price has broken above a serious resistance point, and it closes at or near the highest price of the trading day, then you can almost guarantee the next day of trading will take the stock’s price even higher. Momentum is a major factor, and emotionalism is a HUGE factor in price action. If you don’t remember anything else I say about trading penny stocks, please remember this: Emotionalism, fear, and greed determine market prices. Nothing more, nothing less. All this stuff about the company’s promising future, or a possible product rollout, or some kind of restructuring to increase the company’s business effectiveness, all of that is secondary to the actual excitement, emotional hype, fear and greed that actually steer market prices. If you doubt this, I’ll ask you this: Have you not learned from the past yet? Think about the tech/internet stock bubble of the late nineties/early 2000’s. Think about the Dutch tulip bulb bubble way back in the 1600’s. All of these things prove that there comes a point where the rational, logical minds of men no longer function, and pure greed, hype and excitement take over, to the point where the actual value of the company is completely disconnected from the price action of its stock. Back in the late nineties, people were completely convinced that if you had any type of company that was Web-based, no matter how stupid the business model was, you were going to make tons of money because it was based on the Internet. What a dumb idea that was, in retrospect, because we now know that the same skills and principles that you use to succeed in a brick-and-mortar business also apply to any Web-based business.

Wow…looking back on this post, I’m amazed at how I thought it was going to simply discuss penny stock trading using technical analysis, but it turned out to be a discussion about a whole lotta other stuff too. Oh, well, I guess that’s why it’s a blog, not a technical journal. I’m going to sign off from this extra-long post, but stay tuned for more penny stock trading posts to come.