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Advanced StrategiesUnderstanding Penny Stocks

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Volatility Play Investing I

Based on some of the concepts presented in the previous sections on Technical Analysis, you may be interested in getting involved with Volatility Play investing.

This is a method of trading penny stocks developed by and used by PennyStocks.com and its subscribers. While other services and traders have attempted to copy and/or resell the concept, no one else has had the success that can be gained by following the concepts that PennyStocks.com has perfected.

These concepts, detailed below for the first time for public use, allow penny stock traders to make money off of the same stock again and again, by buying near or at the support levels, and selling near or at the resistance levels. (Support and Resistance Levels are both detailed in Chapter Three).

Others have 'butchered' the concept, thinking that any stock can be used as a Volatility Play. They take a penny stock chart and believe that the buy levels should be somewhere near the year low, or perhaps the month low, and that the sell levels coincide with the upper prices the stock has reached.

Such a basic and assuming way of applying these concepts to penny stocks is sure to be disappointing when it comes time to tally your results.

To appropriately identify a penny stock that would be a potential Volatility Play, you need to follow these steps.

1. First, look for a penny stock that has excellent volatility.

A difference from its year high to year low needs to be at least 100%, but some of the best Volatility Plays we have ever uncovered enjoyed a difference of 300% to 500%. This helps ensure a high level of investor speculation and unpredictability in the underlying stock.

2. There also needs to be a pattern of trend reversals.

The penny stock needs to have hit and tested its lower and upper prices several times, preferably two bottom tests and one or two upper tests.

(By testing, we mean that the stock approached its support or resistance level, but was not able to break through and instead reversed. The reversal should take the stock most or all of the way back to the opposite test level. ie - if it tests and bounces off the high, it should then drive directly towards the low over the following trading days.)

3. The penny stock needs a clearly identifiable support level, and excellent strength at that level.

This does not mean that the support needs to be at a round number, like $1.00. Rather, if a company has just recently announced a stock buy back plan, you can be assured that they will have a lower range at which they intend to pick up shares. If you can identify this level through a surge in volume and a rebound from a certain price, you can expect that there would be good support at that level. While share buy back prices can change over time, most companies will start purchasing at certain prices to keep the shares above a specific level.

In addition, if buyers seem to dip into the market at a certain level, you can usually identify this through increases in volume and a strong rebound off of the support level brought about by sudden buying demand.

A good Volatility Play penny stock always has a strong and easily identifiable support level. This may be $0.45 or it may be $1.00, but you will be able to pick it out easily on the chart through a combination of volume and price analysis.

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