Penny stock markets differ from markets for bigger stocks. For instance, fund managers are generally not interested in penny stocks, because they are almost required so by law. They have limitations like a maximal percentage of the market value of a single security they are allowed to hold. Many small cap stocks are simply not worth the associated work if only a tiny fraction of the fund capital could be allocated to them.
With a different audience the pricing behavior of small stocks is also different. For one, price manipulation is typical and then only sporadic interest in a stock is also. These are the reasons why trading signals in the penny stock markets look very different. Don’t expect your charting software with backtesting capabilities to deliver meaningful results with penny stocks!
So, are there no trading signals possible for stocks with a small capitalization or even an illiquid trading? The simple answer is yes, trading signals are possible, but a market scanner or trading timing algorithm has to work differently.
With bigger stocks trends are created by strong hands like fund managers or momentum players. Both are buying continuously into rising prices, albeit with a different reasoning. Fund operations are driven by value and trend traders think technically. It is the continuous buying interest along with the natural inclination of prices to swing forth and back that produces coherent trends.
In the penny markets prices tend to jump more or at least the trading volume and volatility of a stock spikes at times for some days. Penny stocks are traded best by the consideration of potential and volatility. If the stock has shown in the past that it is able to explode or that its price came from a much higher level, then there is price potential – at least in principal, and that is enough. The best trading signal for penny stocks is historic volatility and new signs of action combined with a beaten down price.
The trading of pennies then works more probabilistic than with bigger stocks. You have to rely on the penny stock potential for large gains, hundreds of percents while the maximal loss is limited to the ante. This asymmetry causes the big advantage of penny stocks for people who are able to exploit it.
Picking stocks with potential, volatility and new activity is the best trading system for penny stocks. The outcome is volatile as predictions in the penny markets are even harder than in other stock markets, but that is not the point of a penny stock picking strategy.
Helpful for trading probabilistically is a penny stock picking service that looks for these situations with price potential and new buying activity. Your task is looking for an honest source of such possible trading candidates. If you found one, don’t be afraid of the statistic nature of this type of trading. With the right money management the result may outrival your general trading of bigger stocks by a wide margin.