As a good trader, we all know that there are two types of analysis in stocks, they are fundamental and technical analysis. Fundamental analysis refers to the operation of the company (management, revenues, debts, lawsuits, contracts, etc.). On the other hand, technical analysis involves finding the patterns on the investment chart.
Of course, there are benefits of using technical analysis, but using it on low-priced shares brings some limitations and risks. Here is how you can trade penny stocks by using trading charts.
The Technical Analysis
Once you have decided on the investment you want to watch, you need to find its performance chart. Or else, you have to find data to make the chart by yourself.
To analyze or graph the performance of the stocks over time, you have to seek the help of a spreadsheet or financial program. That system will help you define the trend line if you feel like it is difficult to calculate it by yourself.
That will quickly help you spot the upsides and downsides. Since the graph lines that generally trending up or down indicates the upsides and downsides.
You can connect the highest peaks together with straight lines and the lowest through together to find the resistance and support lines. Knowing the resistance and support lines will tell you when an investment breakthrough one of them.
After you know the resistance and support levels, you now need to look for and watch the volume to trade for the investment you have chosen earlier.
There will be a trend when the prices and volume increase or decrease at the exact same time. While, if they both go in the opposite relation, then there will not be any trend.
When to Use Technical Analysis for Penny Stocks?
Relying merely on technical analysis is not a quick method to gain huge profits. You have to understand that to trade penny stocks by using trading charts can also mislead sometimes.
It is good to use it in conjunction with big companies which has discovered with fundamental analysis. It also will not work when the stock has a low trading volume that means the more activities will make the pattern more trustworthy.
Also read: The Pros and Cons of Penny Stocks
