How to Read Penny Stock Charts
Every penny stock trader should learn how to read stock charts because it is one of the most critical skills that you must have in order to make money from penny stocks. In this article, you will learn how to read penny stock charts.
What Are Stock Charts?
Stock charts is a chart that shows a stock's prices plotted on a chart over a period of time. The chart shows key information about the trading activity of the stock.
Following is some information that's shown on a chart.
- Stock Symbol - This is the trading symbol of a company
- Time Period - There are different time periods a trader can use. A day trader will be interested in using an intraday chart with a time frame of 1-minute or 5-minute charts. Swing traders will use daily charts and long-term traders may use weekly charts.
- Open - Open price for the stock. On a daily chart, this is the trading price of the stock when the market is open.
- Low - Low price for the stock. The lowest price of the stock during the trading day.
- High - High price for the stock. The highest price of the stock during the trading day.
- Close - Close price for the stock. On a daily chart, this is the last trading price of the day before the market closes.
- Volume - This is the total trading volume for the stock from the market open to close.
Types of Charts
There are many different types of charts a trader can use, such as bar charts, line charts, and candlestick charts. You don't have to learn to read all types of charts, just choose one that works the best for you.
Following is a candlestick stock chart for the symbol VISL. Candlestick is easily the most popular charting type among traders these days. It originated in Japan and it is the chart type that I use.
Following is a sample bar chart for the stock VISL. The bar chart was popular in the early trading days before candlestick charts got popular.
Here is the same stock VISL showed in a line chart.
How To Read Candlestick Chart?
Since the candlestick chart is the only chart type that I use, we will only discuss how to read a candlestick chart and our main focus will be on the daily charts.
The White Candlestick
Let's take a look at how the candlestick chart is formed. The white candlestick is formed when the closing price is higher than the opening price for the stock. The upper shadow is the highest price of the day and the lower shadow is the lowest price for the day.
The Red Candlestick
The red candlestick is formed when the closing price is lower than the opening price for the stock. Like the white candlestick, the upper shadow represents the highest price of the day whereas the lower shadow shows the lowest price of the day.
When we plot all the individual candlesticks patterns for each day of trading on a chart, we get a complete candlestick chart.
How To Analyze a Candlestick Chart?
There are many things that a candlestick chart can tell us about the stock performance in the past and how we can use it to predict the future movement.
- Support & Resistance - We can easily see the support and resistance which is one of the most important penny stock patterns on a candlestick chart. Usually, a buy signal is triggered when a stock is trading around the support, and a sell signal is triggered around resistance.
- Volume Spikes - Volume is a critical indicator in technical analysis. When a stock goes up with strong volume, it indicates strength. It means that buyers are lining up to buy the stock and the stock can rise further. On the other hand, when a stock goes down with strong volume, it indicates weakness. It means there are more sellers than buyers and the stock is likely to fall further.
- Technical Indicators - Most charting platforms nowadays offer a variety of technical indicators that you can choose from, such as the MACD, RSI, ADX, Stochastic, and so on. If you are using any of these indicators, you can plot them into the stock charts. We won't get into the details of technical indicators as it is a topic that deserves its own article.
Top Candlestick Patterns
There are many established candlestick patterns that give bullish and bearish signals, some give trend reversal signals. Following are a few of the most useful trend reversal signals that I use for penny stocks trading.
Doji is one of the most powerful reversal patterns in candlestick charts. It is formed when the open price is equal to or very close to the closing price with long shadows which represents the high and low of the day.
The psychology behind a Doji pattern is that the market is uncertain about the stock, and there are about the same amount of buyers and sellers.
When a Doji occurs on an uptrend, it is a bearish signal to get out of a trade. When a Doji occurs on a downtrend, it is a bullish signal to go long.
Doji is an effective pattern when you combine it with other patterns, it shouldn't be the sole technical indicator that you rely on to enter a trade.
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Bullish Engulfing is another useful reversal candlestick pattern. It shows up on downtrends and signals a reversal may be around the corner.
The Bullish Engulfing pattern is formed when the black day (closing price lower than opening price) is covered completely by the body of the white (closing price higher than opening price) day like the following. In other words, a stock opens lower but closes higher than the previous day's opening and closing price.
For confirmation, wait until the next day and see if the stock goes up. If it does, a buy signal is generated.
Bullish Harami is another reversal pattern. When the pattern is formed during a downtrend, it generates a bullish signal. It looks similar to the Bullish Engulfing pattern except that the first black candle engulfs the second white candle. If the stock goes up on the next day after this pattern is formed, it gives us a confirmation that this is indeed a bullish signal.
Just like the others, when a hammer candlestick pattern is formed on a downtrend, it indicates a reversal may be on the way. A hammer is a candlestick with a small body and a long shadow, the body of the candle can be white or black. A hammer looks like the following.
The Inverted Hammer looks like the Hammer pattern with its shadow flipped over on top. When the Inverted Hammer occurs on a downtrend, it generates a bullish signal.
Although these 5 candlestick patterns are useful, none of them should be used alone. A trader should combine candlestick patterns with other patterns or indicators to get effective results.
I found these candlestick patterns strengthening the signal of the pullback strategy that I share in How to Buy Penny Stocks.
Like anything else in life, chart reading skills can only be developed by reading lots of stock charts. Every beginner should read and understand at least 3,000 charts before getting into the market. By then, you should be able to find a profitable pattern that works consistently.
To learn more about candlestick charts or stock charts in general, read the following articles.
How to Read a Stock Chart
How to Read Candlestick Charts
Top Candlestick Patterns
Learn how to trade penny stocks
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Options Strategy - 738% ROI
Stock Market Basics