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I do not suggest averaging down. Instead, I am a bigger supporter of 'averaging up,' where you buy into strength as a penny stock gains momentum.
We use Leeds Analysis, which considers the state of the market, investor sentiment, and sector influences in our research to pick the best penny stocks for our subscribers. These, along with all of the other factors (insider trading, shifts in social trends), are combined with their proprietary fundamental and technical analysis strategies to uncover the best penny stock picks.
Just ask me about it at this link, on my Facebook Peter Leeds fan page.
All of the same driving factors that influence the broader exchanges (like government policy, interest rate moves, the price of oil, political uncertainty...) also have an effect on penny stocks.
The difference is that smaller penny stock companies usually feel the effects to a magnified extent, because it doesn't take much trading volume to throw the stock around.
One external factor that impacts penny stocks specifically, beyond those touched on above, include social perceptions towards the risk/reward ratio of these speculative investments. When traders are reminded by the media that Microsoft used to be a penny stock (which it never was, by the way - that's a common misunderstanding), they are reminded of the potential gains, and flock towards penny stocks to take their chance. When they hear of an old widow milked out of her life's savings by some hustler, they withdraw from the penny stock scene.
In general, as a bull market progresses and stocks perform better and better, more investors are willing to take a risk with speculative penny stocks, while looking to maintain or exceed the rush of investment returns that their conventional shares had been providing.
After a market crash, or in a bear market, investors tend to look for safety and security, and so are more likely to stay clear of penny stocks.
Most brokers only provide 'option eligible' services to stocks trading above $5.00. If a stock is option eligible, it can be sold short or bought on margin. If not, as is the case with penny stocks, you usually can't. In other words, brokers don't like traders to get fancy with speculative investments.
Be sure to take a look at my earlier comments on short selling penny stocks.
TA is the use of trading activity to attempt to predict future prices of the shares. Review my earlier discussion of technical analysis for penny stocks.
Fundamental analysis is the review of all factors (besides technicals) that play a role in the fortunes and possible future prices of a company's shares. Review my discussion on fundamental analysis with penny stocks.
Well, that's the name of the game, isn't it? You can get penny stock picks in very high quality companies from PeterLeeds.com.