Stocks are all-time highs but appear to be running out of steam here.
How do I know?
(I had a feeling that we were going to sell-off, so I bought some SPY puts yesterday, which have now paid for my family trip to Disney!… If you’re not receiving my real-time alerts, but want too, click here to get started.)
Well, as a trader, I look for clues. You see, anyone can get on TV or hop online and talk up a stock or their position, but to me, that’s just noise that should be avoided.
Instead, I like to focus on what’s real…
That said, when it comes to trading, nothing is truer than volume and price.
Price and volume tell us what traders are actually doing.
As a rule of thumb, when I’m trading, I look for stocks that are experiencing abnormally high volume.
Actively traded stocks give us a chance to get in and out of a position with less slippage. Typically, stocks that have abnormally high trading volume are catalyst-driven.
In other words, traders are reacting to fresh stock news, as the bulls and bears fight for price discovery.
However, I typically stay away from stocks that are in-play (most actively traded). As someone who swing trades penny stocks, I try to limit my screen time, as well as, the number of day trades I take (to beat the PDT rule).
So how do I avoid overtrading, select the right stocks to trade, all while maximizing my effort and time?
I look at charts…specifically, I look for specific patterns that have proven to be highly profitable setups and try to trade those. Read on to learn how I use “technical analysis” to find my A+ setups.
Now, there are a few schools of thought when it comes to trading. Some focus on the fundamentals, some focus on quantitative measures (using math, physics, computer science… what have you)… and some focus on technical analysis (chart patterns and volume).
However, I have found success using chart patterns and volume in penny stocks… and that’s my edge.
You see, chart patterns have been around for so long – and it’s in our nature to try to spot patterns. With penny stocks, using chart patterns actually works out really well.
You might be wondering, “Jeff, how can chart patterns help me make money?”
Well, first things first, technical analysis is not a science. Just because you see a bullish pattern, it doesn’t mean the stock will go up… but it does mean the stock has a high probability of running up.
If you don’t already know, retail traders rule the penny stock market… and we’re not competing against the big banks and hedge funds. So a lot of penny stock traders are more or less looking at the same thing… and that’s a benefit. You see, if you’re able to spot the right patterns, it almost ends up as a self-fulfilling prophecy.
That’s why I use volume and chart patterns to trade.
For example, if you’re looking at a consolidation pattern… so many traders are buying near support (trying to get the right price)… and ultimately, this leads to increased volume and buying pressure. In turn, penny stocks tend to break out and run higher.
Consolidation Pattern Trade Example
Now, here’s what I’m talking about with consolidation pattern – using price and volume.
Check out the daily chart on Flex Pharma (FLKS).
Now, with this pattern, we’re looking for the stock to drop… then trade between a range for some time… and start to trend higher… with volume.
What I mean by “with volume” is that the stock should rise on volume. Basically, we want to see some buying pressure behind a move higher. If the volume bars are small and the stock goes up… chances are there won’t be any conviction with that move… and the stock tends to pull back.
Not only do you have to be mindful of the pattern… you also have to know where previous support and resistance levels are… this helps us identify target areas and stop areas. For example, if you look at the chart above, there are two blue horizontal lines (one at 55 cents, the other above 60 cents).
The blue horizontal line at 55 cents is known as the resistance area – a price level at which the stock had a hard time breaking above. The blue horizontal line in the $0.60s was our target.
In general, I like to buy in the consolidation area – the period after the stock falls and trades between a range. However, with FLKS, the stock broke out… only to pull back near the consolidation area… so I wanted to see confirmation when the stock is running up.
This is where volume comes into play.
If you look back at the chart from earlier, you’ll notice I annotated the volume bar. Basically, we saw the stock trending higher, and had a nice move the day I bought it with some volume behind it. That told me the stock had a high probability of breaking out of the resistance area and trading in the $0.60s soon.
Well, just knowing the consolidation pattern, volume, support and resistance… allowed me to get into this winner.
If you look at the chart above, the stock looked like it could break above the resistance level (which it did)… it was also trending higher (prices were increasing over that period)… and that let me know this stock could run up.
(Returns like these with a small account are possible if you have the right system. Click here to learn more.)
Let’s get a more in depth look at why patterns, volume, and prices matter when you’re trading penny stocks.
Staircase to Profits
Again, we want to buy penny stocks when we notice a bullish pattern and volume is picking up.
Now, volume includes both buys and sell orders. If a stock closes higher with heavy trading volume over a specified period… that lets us know there are buyers and the stock could run higher.
Let me give you another example using my Staircase to Profits pattern.
With this pattern, we’re looking for the stock to uptrend, consolidate (trade within a range)… continue in its uptrend.
Notice the volume here… it’s key.
We want to buy in the consolidation area as there are green volume bars. You see, when there are green volume bars increasing in size… it lets us know the stock could break out of the consolidation area, and the move would be sustainable.
Let’s look at the pattern again.
Again, we want to be buying when the green volume bars start growing in size. Now, as long as the stock’s price doesn’t pull back – or falls back into the consolidation area – that lets us know the stock is poised to run higher.
Notice how every time I bought, as annotated in the chart above, I bought as volume was increasing… using the Staircase to Profits pattern. Now, if the pattern breaks, that’s when we take a small loss and move onto the next trade.