How to Analyze Penny Stock Chart Patterns

Purchasing penny stocks can be a risky proposition because the prices of these stocks are low for a reason. Penny stocks are unproven investments, or have gone through some difficult business or financial periods, which drove the stock price lower. A person can improve the chances of selecting a successful penny stock by learning to analyze chart patterns to determine the best investment.

Instructions

1. Determine the subject of the penny stock chart. Some charts track strictly the price of the stock while others denote the moving average of a penny stock. If you do not understand the chart topic then you will need to research what exactly the chart is measuring.

2. Define the support and resistance level for the penny stock. The support level is the lowest chart point a stock price fell on multiple occasions during a given period. The demand from consumers for the penny stock will not allow the price to drop below the support level. Conversely, the resistance level is high point on a stock chart where price exceeds demand and stock most likely will not exceed that price.

3. Identify the trading range for the penny stock chart pattern. A trading range is when the price of the penny stock remains within a certain price range for an extended period of time. If a penny stock chart pattern breaks the top of this range, it could be setting new resistance levels. However if it goes below the bottom of the price range the penny stock could be establishing a new support level.

4. Notice any trend lines within the penny stock chart patterns. Trend lines will possibly indicate the future prices of the penny stock. If the trend line is upward bound, it may indicate future growth and decline could indicate the opposite. It is also important to establish a comparison trend line. For instance, if the stock market in general is following the same trend line it may be that the stock is following the market and has nothing to do with future price indicators.