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By Daniel Hunter

If you want to get rich with Penny Stocks then you are going to need a strategy. Penny Stocks can a be a risky environment in which to trade but the rewards are commensurate with the risk. Penny Stocks have long been a favourite with penny stock investors due to their large percentage price moves. Penny Stocks are a volatile financial instrument and they are relatively low priced. This provides the big moves that can be profited from if correctly predicted.

Generally traders in Penny Stocks will use some form of technical analysis when deciding which stocks to trade. Technical analysis looks at the supply and demand situation for a stock, and then works out what the trends for that stock is. A trend line is usually developed for the stock. And then resistance levels and support levels are added to the picture. This will tell the trade what the range of prices the stock moves in and the trend line indicates in which direction the stock is heading.

If the penny stock breaks the resistance level it maybe an indication drops through the support level it could indicate that the stock is well priced and ready to buy. Of course the term support level is there for a reason. It may also mean that the stock is no longer supported by the market and is ready to head into free fall. This is where the art of penny stock picking comes into play. You need to understand your stock and why it is moving in the direction it is. Research here is key.

The next key thing you should understand is pivot points. Pivot points are the average of the high, low and close for the stock for that day. If you see the penny stock close above the pivot point this will set a new resistance level.

Another important concept in technical analysis is moving averages. Sometimes in the chaos of a stock moving up and down it can be difficult to see what the overall trend of that stock is. This is why you need to have moving averages. They smooth out the line and make it decipherable. Thanks to the wonders of computer technology a moving average can be calculated at the push of a button. The moving average that you will use will depend on your timeframe and the stock itself. Sometimes you may look at a five day moving average, other times a 60 day moving average is more appropriate.

A moving average is not only useful for smoothing out the lines; it can also show you crossovers. A crossover is whenever the prices move across the moving average. Traditionally it has been considered best practice to buy when the stock price moves above the moving average and to sell when the stock moves below it. There are also the terms convergence and divergence. This is where the trader examines the moving average from different time periods, such as 10 or 20 days. These are then plotted on the graphs and where they meet may indicate that a trend is ending. Typically it is better to buy if the trend has been down and sell if the trend has been up.

Technical analysis is the fundamental skill you need to master as a penny stock trader. While there will be other techniques that you will employ as a trader, understanding the basics of technical analysis is vital to your success.

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