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  • The Art of Trading Penny Stocks Psychological Support and Resistance

    Written by: Dana Salvo

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    If you’re new to trading Penny Stocks this article will help you greatly improve your chances of becoming a better penny stock trader. We are going to focus on what professional traders call psychological support and resistance. What does this mean?

    When trading penny stocks there are certain support and resistance levels that are known to professional traders as psychological levels. This has nothing to do with normal support and resistance levels that chart technicians use on a daily basis when looking for obvious support and resistance.

    The psychological levels can be revealed on your level II trading screen. A level II trading screen shows you supply and demand for each individual stock. We will not go into a full in-depth review of level II in this article; it is something that all penny stock traders should look into. It is a very helpful tool.

    TheStockWizards.net has identified psychological price points for penny stocks over the years. They are as follows.

    We will break them up into different segments of the market. We will start on the low end and work up to the high end.

    Sub Penny Stocks: Sub Penny Stocks are stocks that trade under .01. If you are new to trading penny stocks there are stocks that trade below .01. Not only can you trade below a penny, you can make a lot of money really quick. A reasonable amount of penny stock traders start off trading sub penny stocks. Traders like the fact that they can leverage a small amount of money. You will hear success stories of traders that started with $500.00 that run their accounts up over six figures in less than a year trading sub penny stocks. That is not the norm but it does happen.

    Let’s look at the psychological break points in the sub penny arena.

    Let’s start off by going as low as you can go. 0001 with no bid. How many times have you seen a sub penny stock with no bid and an ask of .0001. Traders call these lottery plays simply because they are very risky in nature. If they do not work out, you will lose your entire investment or will sit on dead money for a very long time. Traders will throw $500-$1000 purely for speculation; they don’t care if they lose their principal. They understand that they are taking a big risk.

    The first psychological barrier would be when you’re trading with no bid with an ask .0001. Demand changes and now there is a bid of  .0001 with an ask of .0002. .0002 now becomes the psychological resistance level. Once the psychological resistance level of .0002 is broken a stock can in a matter of days head up to the second psychological resistance level of 001.

    .001 is a real Psychological Barrier. When broken it can cause a massive stampede of buying. It is very easy to play this breakout because you’re using .001 as your guiding point.  It is a very low-risk trade when going through this level.

    .005 is another Psychological Barrier. But the biggest psychological barrier for sub penny stocks is when it goes from sub penny and crosses into the .01 area. This is another critical area when trading penny stocks .01.

    Once a Sub Penny Stock crosses the psychological level of .01 and stays above this support level a new set of price levels kick in.

    Other Price Points to pay attention to are .05 and .10 cents.  .10 cents is a critical level just like a sub penny stock going through .01. The last two psychological resistance areas when trading penny stocks are .50 and $1.00.

    Once you get familiar with these different psychological levels it will become second nature to you as time goes on. Using a combination of your level II screen with analyzing  volume will help you get a better feel for when a stock is going to break through the psychological levels.

    Learning how to trade penny stocks using psychological support & resistance levels is just another piece of the puzzle that we are to touching on that will help you become a better trader and investor. Understanding these barriers in the penny stock world will help you improve you bottom line. Make sure you read The Stock Wizard’s other informative articles, which will help build confidence in the fast trading world  of penny stocks.

    March 9, 2010 @ 4:39 am Trackback URL Posted in Articles/Opinions, Trader's Corner and tagged with , , , , , , , , .