When trading stocks there is a saying that goes like this “A Picture is worth 1,000 words.” in this article we will identify positive and negative trends when trading penny stocks. Using technical analysis helps you get an idea what traders and investors are thinking about in any particular stock. All you have to do is pull up a monthly weekly or daily chart and you can get a quick idea if you have a positive or negative trend.
TheStockWizards.net uses some very basic technical analysis 101 to help you understand how simple it is to identify a trend. So if you’re new to trading to technical analysis this will give you a great education and a good start.
When trading penny stocks, or any kind of market in general, the goal is to have your money work for you as fast as possible without being considered dead money. Using some of the basic principles in this exercise can help you build up your trading and investing accounts very rapidly if you time your trades and investments wisely with precise timing.
Most chart technicians (traders) that use technical analysis identify trends with trend lines. Trend lines are a very basic form of technical analysis but a very powerful technical tool.
How to Draw Trend Lines
A valid trend line is comprised of two or more points on a price chart connected by a straight line. The origination point of the trend line is not necessarily the high or low point of the price move. A proper trend line starts from when the actual move begins. The two points on the trend line should be between two pivots. These swing points should have enough price movement to construct a trend line capable of containing the trend. The last component of a trend line is the third point, which is contained by the trend line constructed by the first two points. Trend lines are like every other indicator in that it may not work as intended for every security. So, if you find that the price continually breaks the trend line, do not force it on the chart. Use some other indicator to gauge the direction and trend of the security.
Let’s do some basic trend line work on the Dow industrial average going back to the year 2007 when the markets made a top. This will help you make sense of where were at in today’s market. We will use a weekly chart to take a look at the bigger picture and see if we can identify the current trend in the market.
You can see on the chart that the Dow industrial average made a top in the beginning of October 2007. Then it attempted to rally back in early 2008 only to make a lower top in May of 2008. This is where the trend was established. You can see were we drew our trend lines. To establish a current trend all you have to do is connect the tops, Lower highs and lower lows just like it states on the chart.
Dow Chart #2
As you can see the Dow industrial average is currently trading right in the area of the two trend lines that we have drawn on the chart. The bulls and the bears are fighting each other in between those two trend lines. We are waiting for the next move, will it be above the trend line or back below the trend line. We will not out guess the direction of the markets, we will let the markets commit then we will commit.
Dow Chart #3
You can see with a basic trend line on a weekly chart, the markets have been in an uptrend for one year.
Let’s see if we can identify the trends using trend lines when deciding to trade Penny Stocks.
Taking a look at a weekly chart of Clean Coal Technologies symbol CCTC, The stock traded sideways for a year and a half before it decided which way it was going to go. We had trend lines on both sides of the market, we had a downward sloping trend line and we had a supporting trend line connecting the bottoms. All of this action was in 2008 and 2009.it took two years for the stock to make up its mind to start a new trend.
CCTC Chart #1
CCTC Chart #2
After two years the stock has a weekly breakout to the downside. The trend is clearly defined at this point. No reason to catch a falling knife.
Chart # 3
Let’s take a look at CCTC using a 15 minute intraday chart. You can spot a very quick short-term trends for making fast money. If you’re a day trader or a momentum trader you can catch some really nice moves anywhere from 1 to 3 days in some of these penny stocks. Can you really use trend lines on intraday charts? Let’s take a look.
Nutra Pharma Inc. Symbol NPHC. In this example we will go out to a monthly chart and take a look at the bigger picture.
Looking at the daily chart (NPHC)
Manas Petroleum Symbol MNAP. Using a longer-term monthly chart the stock has broken its downtrend.
Cord Blood America Inc. Symbol CBAI (Weekly Chart)
CBAI Chart (Daily Chart)
Summary
Trend lines can be a great visual tool, but if it is used incorrectly, they can also produce incorrect signals. While trend lines are a very basic tool for analyzing the trend of a stock, there are other considerations to make when you invest or trade a stock. Using trend lines is as much an art as it is a science. Experience will help you become better at identify lasting trend reversals from failed trend lines. Practice, practice, practice. If you get in the habit of drawing trend lines, connecting the dots it will become second nature to you.
Other considerations:
1- The more times a stock touches a trend line, the more significant it becomes.
2- It takes to touches to draw a trend line, but three to confirm it as being a valid one.
3- In a downtrend crowd align along the highs of prices.
4- The steeper the trend line, the less reliable it will be.
5- A trend line break does not mean that the trend will change.
