Lessons From A Penny Pro

How to Using Moving Averages for Entries and Exits

The futures are pointing to a higher open tomorrow…but it’s hard to say if it will stick. After all, I doubt there is too much trading volume on this Memorial day.

In any event, I want you geared up for Tuesday’s trading session. That said, I’d like to talk to you about some of the most important elements of putting a trading plan together.

That is your entry and exit price.  

You see, a great trade idea alone isn’t enough to guarantee you success trading penny stocks.  For example, we can all trade the same stock and have completely different results.

How?

For example, let’s assume two traders got long the same stock and both were risking $500 each.

Trader A buys 1,000 shares of ABC shares at $10 per share. The trader is giving themselves $0.50 of risk before they get stopped out.

Trader B buys 5,000 shares of ABC shares at $10 per share. The trader is only allowing themselves $0.10 of risk before they get stopped out.

As you can see, Trader B has to be almost perfect on their entry or they will get stopped out fairly quickly. This could be an example of a good idea but bad execution.

Now, one of the questions I get asked a lot is:

“How do you know what level you should be looking to enter and exit a trade. I keep getting stopped out, when I should be winning on these trades.  What’s your advice?”

Read on to find out my answer, and learn about the simple tools I use to avoid getting stopped out… as well as, real money case studies teaching you how it’s done.  

 

How to Use Moving Averages to Profit

 

If you’ve ever seen penny stocks before… they’re pretty volatile. In other words, they move a lot… in either direction… making it hard for some traders to know when to buy and sell.

Well, I’ve actually developed a simple process to trade penny stocks. 

You see, technicals work when you’re trading penny stocks.

For example, I like to use moving averages to time my entries, as well as support and resistance levels.

Now, I recently put on some trades… just based on moving averages, and many have been wondering how I knew when to buy and sell. That said, let’s walk through a few of my trades and how I used moving averages and resistance levels to take profits.

But first, let’s get an idea of how moving averages work.

 

Moving Averages Explained

 

Moving averages are great tools to identify overall trends, and spot key support and resistance levels. Now, a moving average helps filter out some of the noise from choppy price action and is considered a lagging indicator.

In other words, moving averages are based on past prices. What that means is if you select the 20-day simple moving averages… it sums up all the closing prices over the last 20 days… and you end up with one price.

Don’t worry, you don’t have to worry about how to calculate it… charting software already does that for us.

Now, there are a few different moving averages, but we’re just focused on the simple moving average (SMA) here.

 

Moving Averages as Support and Resistance

 

Here’s a look at a resistance line.

 

 

Now, this is our most basic type of resistance. Basically, that horizontal line is static… in other words, it doesn’t change. This resistance level is where the stock has had a tough time breaking above before… but once it did, it skyrocketed.

Then you have support.

 

 

The lower blue horizontal line is a support level… that means the stock has had a tough time breaking below that… and generally, I like to buy as close to that level because if it breaks below, we have a clear stop-loss area.

But what above using moving averages as support and resistance?

Now, horizontal lines work great… but they’re not dynamic… in other words, these support and resistance levels are constantly changing because they depend on price action.

That said, using moving averages as support and resistance levels could help you time your entries and uncover more trading opportunities.

 

Moving Averages as Support and Resistance Case Studies

 

The beauty of using moving averages is the fact you can combine it with your traditional horizontal support.

For example, check out this daily chart in IPIX.

 

 

Notice the blue line horizontal line there? Well, just above that, there’s a 20-day moving average (the blue line tracking the stock’s closing prices).

Well, look how that level held up.

There were buyers right around the 20-day SMA… and it had a tough time staying below that area.

Now… I actually traded this stock.

Did I buy right at the 20-day SMA?

No.. I actually waited for confirmation because that’s what I’m comfortable doing.

If you’re comfortable with buying right around simple moving averages when they hold as support… then you can do that… because everyone has a different style of trading.

Here’s a look at the chart in IPIX again.

 

Now, I bought IPIX at 31 cents… the 20-day held as support… it broke above the 200-day SMA and closed strong with heavy volume. In other words, there were buyers… and I was looking for a next day gap up.

The following day, I sold the stock at 36 cents (the high of the day)… because the stock wasn’t strong out of the gate.

That was a winner in my $2K account.

 

(If you have a small account and are struggling… and think these alerts can benefit your trading, click here to get them in real-time)

 

Moving on.

Remember the first chart I showed you with the blue horizontal line… and what the stock did after?

Well, the same goes for moving averages when the stock breaks above it.

 

Moving Averages for Breakouts

 

You can also use moving averages to buy a stock on strength (or when it breaks above resistance). You see, when the price crosses above a key moving average, like the 20-, 50-, or 200-day SMA… it indicates the stock could run higher.

Keep in mind, I don’t just look at moving averages and price action to get into a stock… I’ll also look at volume.

For example, here’s a look at a moving average price break trade that I recently had.

Check out this daily chart in Sesen Bio (SESN).

 

 

Do you see the green line and the stock closing above it?

Well, that green line is the 200-day SMA. If you look at the previous price action… the stock had a tough time staying above that line.

However, this time it was different.

The stock was making higher highs and higher lows… in other words, it was starting to trend up. Not only that, we saw volume rising with the stock.

So with those three little indicators… I was able to spot an entry level (just above the 200-day SMA).

 

 

The very next day… the stock closed at $1.72!

Now, I didn’t pick the top in SESN… but that’s a nice winner right there… just by looking at price action, volume, and the moving average price break.

If you have a small account, and want to build it into one you can be proud of… and day trade if you wish to do so… click here to get started.

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