It should be standard to check out a penny stock’s financials to ensure it is a viable company, but with the volatility of penny stocks, financials are not necessarily a good predictor of price action. This is where technical indicators come in. Technical indicators rely solely on information from the stocks price charts and trends without regarding the underlying company in order to predict the price of the stock. There are some major technical indicators to know that can be used alone or together to confirm or deny a trend you might see forming in a stock’s price.MACD (Moving Average Convergence-Divergence)
Moving averages plot the average of a past number of days as time goes on, and MACD typically charts the difference between the value of a 12 and 26 day exponential moving average. This difference chart then has a 9 day moving average, or “signal” line, added on top of it, and the way they cross each other signals buy or sell opportunities. When the MACD crosses below the signal line it is a bearish sell signal, and when it crosses above the signal line, it is a buy signal.
These indicators track momentum by looking at where a stock closed in relation to its recent high-low range. The recent close is expressed as a percentage of the high-low range and this data is used to plot various indicator lines, known as %K and %D. Signals can be obtained in several ways, including by %K-%D crossovers, stochastic lines going outside the 20-80% threshold, or divergences between stochastics and the stock price chart.
These “bands” are lines plotted two standard deviations above and below a simple moving average for a stock. Since standard deviations reflect recent volatility, the bands will move closer together towards the moving average when there is less volatility and farther away when there is move price action. Traders look for the price chart to move towards these bands as bullish or bearish signals. If the price moves towards the upper band, it indicates the stock is overbought and due for a drop, and price movement towards the lower band reflects the stock being oversold and ripe to buy.RSI (Relative Strength Index)
This indicator looks at momentum of a stock based on the average of its gains in positive closes divided by the average amount of its losses on down days over a set number of days. This comparison of what amount it goes up by to the amount it normally goes down by yields an index of 1 to 100. If the index nears 70 or more it is a sign that the security could be overbought and ready to turn down. When the index goes towards 30, it is a bullish indicator that the stock could be undervalued.
Technical indicators are more useful with shorter term data and holding periods, as is typically the case with penny stocks. While it is important to get as much fundamental company information as possible, traders are dealing more in short term trends than year over year growth. Gathering as much knowledge and practice with technical indicators as possible sharpens the process of spotting trends and in the end, creates better traders.
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