One of the key advice given to all investors is – follow the trend. But what exactly is a trend and how can you make profits from penny stocks by following the trend? Let’s explore more!
What is a Trend Line?
In simple terms, trend lines are basically virtual straight lines. The trend line is created by first joining two or more price points of a chart, then extrapolating that line into the future.
Trend lines are of two types – an Uptrend line, and a Downtrend line.
Interpreting an Uptrend
Whenever a stock forms higher highs and higher lows in its price, it is said to be in an uptrend. By joining the pivot lows of two or more price points, an uptrend line is created.
As long as the price of the stock remains above this uptrend line, the stock’s uptrend is said to be strong. The figure below indicates a stock that is in an uptrend.
Interpreting a Downtrend
Whenever the stock forms lower highs, it is said to be in a downtrend. The downtrend line here is formed by joining two or more high price points.
As long as the stock price remains below the trend line, the downtrend is said to be strong. The figure below indicates a stock that is in a downtrend.
How to Pick Out Good Trades of Penny Stocks Using Trendlines
Trendlines can be highly helpful for picking out the ideal entry points for buying or selling penny stocks. Let’s see how.
For Bullish Trades
- During an uptrend, if the price of a penny stock falls and reaches the uptrend line, the pullback stays above the previous low and then moves into the vicinity of the uptrend line, it is an ideal level to buy the penny stock.
- If the penny stock is a downtrend and it breaks out from the downtrend line with a high volume, buy the penny stock.
For Bearish Trades
- During a downtrend, if the price of a penny stock rises up and reaches the downtrend line, the pullback stays below the previous high and then moves into the vicinity of the downtrend line it is an ideal level to sell (short) the penny stock.
- If the penny stock is an uptrend and it breaks down from the uptrend line with a high volume, sell the penny stock.
To reaffirm the ideal entry points and exit points for trading penny stocks, Fibonacci Retracements are also used in conjunction with trendlines. Doing so can help to find areas the price is likely to pull back to or move up to.
Price Channels and Stop Losses
Trend lines can also be used for forming price channels. For creating the channel line, you have to draw two lines – the first one joins price chart highs and the other price chart lows. Using these channel lines, you can set the stop-loss level for trading penny stocks which are in an uptrend or downtrend.
In the case of an uptrend channel, you can book the profits when the prices reach near the upper line and set the stop-loss order under the lower line.
In the case of a downtrend channel, you can book the profits when the prices reach near the lower line and set the stop loss order near the upper line.