How Does Technical Analysis Work?

When it comes to penny stock trading there are a few types of analysis that go into the process.

The most traditional of these methods is the fundamental format of looking at all penny stocks. This method involves taking a close look at the companies whose stock you are thinking of investing in. This information consists of doing your homework on their management structure, revenues, debts, as well as things like lawsuits and even contracts.

While this fundamental investigations into all penny stocks is a classic method of investing, there is also technical analysis that has been growing in popularity among investors. Technical analysis is a way of using all of the big data that is collected about companies, and using them to find patterns in trading charts in order to find clues and details about investors psychology.

While technical analysis can be heady stuff, there is a lot of information available within trading charts if you know what you are looking for. Some of the benefits that can come from using technical analysis while penny stock trading include helping you find stock right before they take off, avoid stock that are about to regress, and even identify strong shares that are going to stay resilient.

Since penny stocks are traded at much lower volumes than other higher-valued shares, there are some of the more classic technical analysis methods that simply cannot provide you with indicators that can be trusted, which makes technical analysis for the best penny stocks a bit more tricky – but not impossible.

Here are a few of the most reliable technical analysis patterns for investing in penny stock trading:

Bottoming Out Patterns

This pattern can help you find a penny stock that could potentially boast some of the best long term holds. This pattern will emerge after a stock has suffered a long and sustained decline in share price. After this period of decline (usually over a few months,) the share price will go through a few week period of sideways prices. This pattern usually indicates that the shares are about to enter an extended period of sustainable recovery.

Topping Out Pattern

Similar to the Bottoming Out Pattern, the topping out pattern involves looking for a stock that is in the process of balancing out. While the previous pattern could be found when stocks were on the recovery and rising, the topping out pattern shows when a stock has had an extended period of time where it was climbing, and has just started leveling off, or even going sideways. In the world of penny stocks this pattern usually means people are going to be preparing to move the stock in order to capture the highest price. This usually results in the share prices tumbling.

Against the Trend

This pattern is one of the most reliable pieces of technical analysis for penny stocks, as well as nearly any stock. The Against the Trend pattern will show you strong penny stocks that have resilience and can hold up under pressure. This pattern can be searched out when markets, or industries drop by 10-15%. This drop will see a lot of the shares within that industry drop, as well. However, the shares that hold up best through this hard time are the ones that are going to gain the most (and quickest) when the market recovers. So, even when things are not looking to great for certain industries, technical analysis can help you get in on the ground floor of rebuilds, or avoid buying right before a massive sell off.