Attempting To Trade Penny Stocks

Penny stocks are amongst the most obscure stock options available to traders and investors and as a result of this they are generally only traded on obscure markets such as the OTCBB and the Pink Sheets. In their obscurity is an element of mystery and potential riches and this is what draws in traders around the globe. Penny stocks have the potential to make major profits with only small investments but any trader will know that they come with potential pitfalls. However the lure of penny stocks can be hard to ignore and attempting to trade them successfully is a pursuit that many traders take.

All traders attempt to make sense of a market and future market directions by making use of technical analysis. Traders will often use a number of indicators and data and combine the information gathered to try and predict the future behavior in the market and then enter or exit the market based on their findings. Unfortunately with penny stocks, technical analysis does not quite have the same effect and it cannot be used in quite the same way. Current technical analysis tools are suited and designed to analyze much larger trades than penny stocks and due to this the same analysis cannot be applied. Technical analysis essentially becomes worthless. However, as if to make things worse for those hoping to successfully trade penny stocks, technical analysis experts ignore penny stocks for another reason. Penny stocks that trade for under $5 each day often have a low trading volume that falls beneath the 500,000 shares per day barrier. With such a low trading volume, traditional technical analysis is extremely unreliable and this is why technical analysis experts tend to steer clear.

However occasionally there are penny stocks that trade at higher volumes. Some even trade over 1,000,000 shares per day. In these instances there is hope that technical analysis would work and would play an important role in the prediction of future market behavior. In the instances when penny stocks are traded at high volumes a trader might well be able to use technical analysis to their advantage and successfully trade penny stocks.

Arguably the most important aspect when attempting to successfully trade penny stocks is the ability to keep in touch with rumors, news and speculation. This is considered extremely important because penny stocks often have little disclosure and only select pieces of information surrounding the stock will be available to the traders. This makes news and rumors all the more important because with such little information available, a reliable piece of news could have a massive impact on a penny stock. The best way to keep in touch with speculation and conjecture is to frequently keep abreast of any hearsay from the penny stocks communities which exist around the internet. It is a wise idea to assess how certain penny stocks react to certain pieces of news once they break. This enables a trader to analyze and predict future reactions so if a similar rumor emerges the trader might know whether to invest or sell a particular stock.