The opposite of a trading signal is a value signal. Value investors often have a limit below which they will buy a stock, because it is then considered cheap enough. In other words, the chances that it will go up beyond the entry price are viewed to be sufficient for an investment. The problem with this trading style, also called investing, is of course the lack of timing. You may run out of time and get old with this sort of trading, unfortunately without becoming rich at the same time.
A simple solution could be to combine value investing with some timing techniques. For larger stocks this is difficult. If you specify the right entry point by fundamental considerations, then fine. But done on a technical basis alone there is a problem.
Technical trading works, among other reasons, because there are other traders doing the same you do. As if they were driven by the invisible hand that is virtually guided by statistics and makes insurance companies money, traders behave predictable in situations they recognize.
But stocks moving chaoticly at some year or multiyear low are not on the radar of tech traders. The situation is not similar to a broad market downturn, where everybody, or at least every bull, feverishly expects the next start. A company and with it its stock slowly recovering from the dark ages doesn’t fit in any trading category, except bottom fishing . But that is more investing than trading, at least with bigger stocks.
Right, penny stocks are under- and overvalued simply because they move up and down. In so many cases the real value of such a beast is not even estimable. The best guess for its possible range of sensible valuations is its historic price range. There we have it. If a penny stock is currently priced far away from its long-time high it is undervalued, statistically of course.
The fine thing in the small cap markets is that there are traders who monitor recent market activity. Any volume increase that goes hand in hand with higher prices is a strong trading signal for penny stocks, because it draws more attention to it. Small cap stocks differ here significantly to large turnaround plays.
Thus swing trading for small cap and penny stocks works like this:
- Scan the market for undervalued stocks, which simply means, look for ones that at one time had seen much higher prices.
- Select those that show signs of revitalization with spiking trading volume and prices.
This trading system is sort of a swing value investing. It is about value, because statistically cheap stocks get bought and it is about swing trading, because a real technical trading signal is used for determining the entry point.
There is just one small problem. You would have to monitor a huge market and sift out the many situations that look like nothing else than pump and dump. If you are quick, it is possible to make even with these traps of the crooks some money, but the odds turn against you. One solution is to use this external penny stock scanner that all in all does the above. Trust is important here!