Advanced StrategiesUnderstanding Penny Stocks by Peter Leeds

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Penny Stock Trading Windows

Any experienced trader, whether dealing in penny stocks or otherwise, will tell you that the majority of stock gains are produced in short time frames.

In other words, the big 50% and 200% price climbs (and collapses for that matter) often happen in a matter of days or weeks, while the same stock may level out or trade within a narrow range for months at a time, before and after the move.

This is especially true when a penny stock is reacting to significant news. Even the most volatile penny stocks may have a trading range that varies 40% to 100% from high to low, but when that news breaks, the price of the shares also break out of the range and soar higher (or lower) within a matter of days... or hours!

To make the most of your money, you may benefit from trying to ride the gains that these windows provide, rather than holding the shares over the longer term and taking the exciting rises along with the drawn-out boredom that can come in between.

There are four ways that we have identified to increase your chances of holding shares just before they make their moves.

1. Technical Analysis Indicators

Some trading patterns can help you anticipate a break-out or strong price move to the upside. Penny stocks can often bounce off of support levels, reverse their trends, explode out of consolidation patterns, or bottom out. Each of these technical analysis patterns is a part of Leeds Analysis, apply specifically to penny stocks, and can prophesize the coming of a penny stock price move.

2. Type of Company

Different penny stocks are prone to different trading activity based on the industry or sector they are involved in, or the type of business they operate.

For example, retail stores have a certain predictability of earnings and revenues that does not allow for sudden explosions of price. Instead, they are more susceptible to longer, less dramatic price trends.

Meanwhile, a biotechnology company can see its share price suddenly double or cut in half based on news, rumors, or even rampant speculation. FDA approval? Law-suit from side-effects of their primary drug? The driving forces for a biotech penny stock to see its shares ramp higher are usually dramatic. This is true even if traders do not realize or understand what the FDA approval means for the company, or what the drug actually does!

Other penny stocks that are subject to spiking higher include research and development corporations, companies with inventions that require patent approvals, and those businesses that operate on a contract by contract basis, where one major agreement could represent a significant portion of their total revenues. (Defense industry suppliers often see their share price thrown around suddenly, while healthier, more stable companies are insulated from the volatility).

Other penny stock companies that are not necessarily subject to the same sudden price moves are things like restaurants, retail, and entertainment.

Most other companies fall somewhere in between, and are subject to price moves if the driving forces of their industries suddenly factor in. (For example, a war in the Middle East will affect oil production penny stocks).

Four Ways to Identify Popping Stocks

  1. Technical Analysis Indicators
  2. Type of Company
  3. Volatility
  4. Anticipation

3. Volatility

Some penny stocks are naturally more volatile than others, for any of a number of reasons, or sometimes for no conducive reason at all.

Try to find the beta value for the companies. Sites like Yahoo Finance will have the information. Beta is a measure of volatility compared to the overall market. A penny stock with a beta of 2.0 is twice as volatile as the market, while a beta of 0.5 means that it is half as volatile. A beta of 1.0 would mean the underlying penny stock is equally as volatile as the overall market.

4. Anticipation

It is possible to predict the approximate time when most companies will release their financials (or you could just e-mail their public relations contact and ask). If you expect the details to surprise the street and you get involved before the release, you may be in for a good price ride.

Going one step further, if you can anticipate other types of releases you may be able to benefit even further. For example, many biotechs will delineate their time line for product development, FDA applications, expected approvals, and product sales. Sometimes it is just a matter of reviewing their previous annual report.

By having this information ahead of time you could locate key buying opportunities, just before the company has several upcoming landmark dates. If the price is right, load up on shares several weeks before they are expected to finish the development of their latest product. Certainly a news release can be expected, and in many cases it will affect the stock price, even though there are no material changes or surprises that come out of the company.

From another perspective, anticipating the biotech's time line can help you develop exit opportunities if you are hoping to unload shares, and want to sell into some buying strength to get a better price. The same concepts can be applied to penny stocks from different industries, but the timelines, effect of releases, and results will differ from one sector or type of corporation to the next.