The Securities & Exchange Commission defines penny stocks as stocks of small companies that trade below $5. Investors look to penny stocks to multiply their investments. Since the prices of these stocks are cheaper, it is possible to grow returns faster. But first, investors have to know which penny stocks are set to rise. Analytics are often used to scan for big movers.
Big on Volume
Volume is crucial to penny stocks. Since the prices of these stocks are cheaper compared to blue chip stocks, a high amount of trading volume one day can move the penny stock faster. Traders set up volume-based scanners to detect price movements. They can use analytics in price charts to do so. One analytic is Average Daily Volume (ADV). This compares the volume today against the historical volume profile of the stock. If the volume today is higher than the 30-day ADV, pop-up alerts from the trading application can tell the trader of a possible bullish trend.
Most traders also set up price alerts that inform them of how the stock is performing. Common benchmarks used are the day high, day low, or the annual high and low prices. To do so, traders can again use price charts with pop-up alerts or sound alerts to tell them when the stock reaches a certain price range. For example, when the current price of the stock rises above the year-high, the alert can tell the trader of another possible bullish trend. Since penny stocks are usually volatile, the trader may use price alerts with tighter benchmarks so he can get in early on the stock.
The Relative Strength Index is available in many trading application tools or price charts. The RSI is used to detect whether a stock trend will persist. It does so by telling us if the stock is overbought or oversold. An index value above 70 means the stock is overbought, and an index value below 30 means the stock is oversold. Traders can set up pop-up alerts against these index values. This will help them determine the right time to enter into a trade and buy or sell the stock.
As important as the price and volume analyses are to stocks in general, the qualitative research is equally vital. Listening to earnings announcements, merger news or even the status of regulatory filings can all be useful to investors looking for stable companies to invest in. Some investors can set up news alerts to see which companies are in good standing with the SEC and meeting their reporting requirements. Although penny stocks are not always required to publish reports, investors may see a lack of transparency as a sign of internal company struggles.
Victor Rogers is a professional business writer who started his career as a financial analyst on Wall Street. He later expanded his experience to content marketing for technology firms in New York City. Victor is an alumnus of St. Lawrence University, where he graduated with honors in economics and mathematics.