How to Predict a Stock’s Performance
You’ve made it over halfway through my 10 steps to success with penny stocks guide. Congrats!
You’re in the home stretch.
I’ll send you one more issue with the final steps tomorrow, and you’ll have successfully gone through the entire guide.
These last few steps are crucial, so don’t back out now.
Let’s get right into step six:
6. What Are the Key Indicators?
When evaluating penny stocks, you want to look at key indicators to determine whether a stock will perform well in the future.
Penny stocks don’t have much in the way of fundamental information because, as I said before, they don’t have to publish financial documents.
However, there are a few things to look for when trading penny stocks. Positive and negative indicators tell you what kind of risk you’re taking on by investing in a particular stock, even at a nominal amount.
The positive indicators you want to look for include the following:
- Positive earnings and new contracts
- Positive financing
- New partnerships
- Increases in trading volume
- Positive industry news
You also want to look for negative indicators that suggest you should steer clear of a stock or short-sell it:
6. Financing secured through desperation
7. Rumors of negativity from within the company
8. Poor industry news
9. Reduced trading volume
7. Key Penny Stock Chart Patterns
Since penny stocks are thin on fundamentals, technicals take on a far more important role. Learning how to read chart patterns can make you a better trader.
More importantly, you’ll begin to understand how stocks behave in specific market conditions.
This is something that happens over time.
You can learn to read chart patterns but still not really understand them. Think of each stock as a personality. It has its own way of moving depending on the company behind it and external factors.
Regardless of the type of chart you prefer, I recommend looking at a six-month snapshot. That’s usually a healthy time period by which to judge a stock’s momentum.
The four most common types of charts are the following:
Personally, I favor the candlestick.
It’s easy to read movement in a candlestick chart based on whether the “wicks” are black, white, or red. Others like bar and line charts because of their simplicity, while I don’t know anyone who prefers area charts.
They’re messy and difficult to understand at a glance.
Chart patterns describe how a stock price moves over time — specifically in up and down movements.
Although history doesn’t always predict the future, you can identify patterns that allow you to make educated guesses about a stock’s future performance.
This is my favorite type of chart.
The stock’s price moves in one direction — up or down — with regular but brief changes in direction that quickly reverse.
I can’t stress enough that you need to pay attention to clean charts. They’re highly predictive and can allow you to take advantage of quick profits on a long position or a short-sell.
However, you don’t want a chart that looks too clean.
This type of chart has an upward or downward trend with almost no variation. An extremely clean chart — especially one that remains clean for six to 12 months — often precipitates a steep increase followed by a steep decrease in price. If you’re not fast enough, you could lose significant cash.
You might have heard the terms bull and bear market. A bull market trends upward, while a bear market trends down. The same applies to chart patterns.
A clean bullish chart shows a steady upward trend. The stock price might fall on occasion, but it jumps right back up — often farther than it was before its brief decline.
This is a good time to make your play because you’re likely to see the trend continue.
A clean bearish chart is the exact opposite of the clean bullish chart. There’s a definitive decline in stock price over time. It might spike every once in a while, but the downhill pattern is evident from first glance.
It often happens after a steep increase in price. A company might announce new funding, for instance, that excites investors.
The stock price shoots up, but it can’t sustain the hype, so it begins to fall precipitously.
Clean Breakout and Clean Breakdown
Clean breakouts and clean breakdowns show that a stock has either broken through resistance or fallen below support respectively. The chart is clean because the pattern either repeats itself or shows significant pattern repeats prior to the breakout or breakdown.
Clean Cup and Handle
You can identify a cup and handle chart by its shape.
You’ll see a smooth downward trend followed by an equally smooth upward trend. After that, the price drops precipitously.
It’s difficult to play this type of chart, but I’ve done it.
I encourage you to look at messy stocks.
Their charts are all over the place with no discernible pattern.
The stock price might jump for no reason at all, fall a little bit, rise a little bit, fall again, and so on. But those peaks and valleys don’t repeat reliably.
While I think you can learn from these charts, don’t trade on them. There’s no way to predict what the stock will do next because you don’t have a pattern from which to learn.
A messy break down starts with an upward trend. At first, the chart will look pretty clean (and appealing).
Then, seemingly out of the blue, it’ll drop.
The pattern becomes extremely messy from there, with dips and increases that have no obvious reason behind them.
Later in this guide, I’ll cover even more chart patterns that you might want to consider watching. I’ll also go into more depth about the patterns listed above so you can begin to visualize what ideal stock charts look like.
You’re almost there — the final steps (and most important) will be in tomorrow’s issue.
It’s been a long few days, but if you’ve stuck with me this far, you’re unlike most. I give you props, you’re one of the few dedicated to improving your trading skills.
Stick around for the final installment of this guide.
— Tim Sykes
Editor, Penny Stock Millionaires