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How to Pick Penny Stocks – The Basic Approaches Used to Analyze a Penny Stock

Posted on March 7, 2009 by Penny Stocks Picker

Three basic categories used to analyze a penny stock

There are numerous methods one can use to analyze a stock in order to evaluate price and future performance.  In general, the majority of the methods fall into two distinct categories, which are; fundamental analysis and technical analysis.  However, A third category that is equally important (if not more) is psychological analysis.  Psychological analysis must be considered when you research penny stocks and prepare for a penny stock trade.  I believe the elements within each of these three categories, can at times interrelate with one another (i.e., News can effect each category).  The information below is just a starting point, there are many resources on the internet to obtain more detailed information.

FUNDAMENTAL ANALYSIS
The first basic approach to analyze and estimate the future price of a particular hot penny stock company is by fundamental analysis.  This technique uses any type of fundamental data about the company or market that could affect the security’s value.  It includes all qualitative and quantitative elements, such as; share structure, news, financials (assets, liabilities, cash flow, earnings….), future market viability, company management and so fourth.  By evaluating each of the fundamental elements of a company, traders can make some estimations weather a specific stock price is over- or undervalued.  However, fundamental analysis does not always explain the movements of a particular penny stock.  Fundamental elements of penny stocks can be difficult to obtain or rely upon and hence I usually don’t spend much time analyzing fundamentals when trading penny stocks (it’s more important for long-term investors).  To obtain more on-line information on this approach, type “Stock Fundamental Analysis” in a web search engine (i.e, Google or Yahoo).

TECHNICAL ANALYSIS
The second basic approach to forecast future price direction of a particular penny stock is to study past market data and behavior, mainly; daily share price and volume.  The examination of a stocks past share price and volume movement is known as Technical Analysis and is widely used by day traders who study chart patterns in order to predict future price movements.  Technical analysts more commonly referred to as ”chartists” use a wide array of charts and indicators to evaluate the price and volume data in order to identify patterns that signal or confirm the timing of a penny stock trade.  Every hot penny stock trader must know how to read a basic historical price chart (I like daily and 5 minute candle stick charts), and be able to identify support and resistance zones, trend lines, patterns and the effect share volume has on a penny stock price.  This is just the tip of the iceberg, you must make an effort to learn as much as you can regarding technical analysis.  A good penny stock chartist can pretty much ignore everything else (fundamentals, psychology…) because the chart will reflect all this information.  This is why I use technical analysis as my primary tool in order to identify the next hot penny stock suggestion for the SureFirePennyStocks list of penny stocks to buy.  To obtain more on-line information on this approach, type “Stock Technical Analysis” in a web search engine (i.e, Google or Yahoo) and become a sponge.

PSYCHOLOGICAL ANALYSIS
The third basic approach in determining price direction of a penny stock is to understand who you are playing against and how they (the market participants) feel at any one time as a result of any fundamental or technical analysis.  I call this method psychological analysis.  Psychological analysis is always the second aspect I evaluate when trading penny stocks and listing on SureFirePennyStocks list of suggestions.  After all, trading penny stocks is just a big game, there are winners and losers, to be a winner you need to know who your opponents are and what they are thinking.  A good place to start getting inside the heads of your opponents is to check out stock message chat boards.  One of my favorites is the Investors Hub Bulletin Board.  For details about using IHUB, please refer to my Investors Hub Article.

If you don’t have a clue who you are playing against or what these market participants may be thinking, then you likely will be the loser.  You must predict how the market participants are going to react to any of the many elements (fundamental and technical).  Think about who’s playing on a particular day and what they expect, when will they get in and out (the chart should tell you that), and any new developments that will drive interest (potential bag of gold or vice versa).  The charts will show the past psychology of the market participants and can also be used to predict future participant psychology.  Please review our other articles in our category archives for additional information (Introduction-A must read, and other Education articles in the category archives).

So, with that be known, what do you think the market participants are thinking for Monday?  Anything interesting?  I’m thinking that president Obama plans to rescind limits on federal funding for stem cell research on Monday may make many of the penny stocks in this sector take off next week.  So, look for my list of suggestions for Monday to follow featuring stem cell penny stock companies.

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