Technical Analysis: The Preferred Method for Penny Stocks
Although there is an ongoing debate as to the merits of technical analysis versus fundamental analysis, technical analysis is the most relevant for investors that trade penny stocks. The very nature of penny stocks is that they are often volatile, and there is limited information available on them. The information that is available is often unverified, and technical analysis is usually the only sort of evaluation that investors can make on OTC stocks.
Technical analysis generally ignores the elements of fundamental analysis and replaces them with an examination of price action. It is the best choice for traders on the OTCBB and Pink Sheets, because investors can do independent research into price movement which will enable them to choose stocks that will change in price in the near future.
Technical analysis is useful, because a main goal of over the counter trading is to make quick profits. A main difference between fundamental traders who look at the long term, like Warren Buffet, and technical traders, like those who specialize is day trades, is the length of the trades. Technical traders are focused on using their knowledge to make decisions on a daily basis because they demand quick results.
Using the tenets of technical analysis, investors can observe dollar volume behind patterns in order to verify if they are real or not. OTC stocks can be quick movers, and it’s easier to make profits through short term moves rather than holding a position for weeks or months. This makes technical analysis the best choice for trading on the OTCBB and Pink Sheets, as most penny stocks are not good to hold on to as long term investments. While this makes the market fairly volatile, it can also lead to quick profits being made for short term traders.
Profit potential with penny stocks is not limited to small amounts either. Many stocks have been known to increase by 100% – 200% in one day, and it is not uncommon to find stocks which can provide 1,000% gains over the course of several days. Finding these types of opportunities takes some skill and some luck, but having a solid knowledge of the chart formations and technical indicators will allow traders to make skillful decisions in a short amount of time. The path for traders to get to this point can be difficult, but the knowledge that traders pick up along the way puts them is a powerful position to come out on top.