Secrets of Penny Stock Investing (On Balance Volume)
There are a number of technical analysis (TA) techniques which our team applies in relation to penny stock investing. Some trading patterns imply that prices are going to spike higher, while others suggest growing interest in the shares among investors, or even the money flows into and out of the stock. A resistance level, for example, demonstrates a price point where the penny stock may have trouble breaking above.
One of the TA indicators with the greatest (and generally most accurate) application is On Balance Volume (OBV). This is a simplified method of illustrating net money flows into and out of a penny stock. When OBV shows money pouring into a penny stock, but the shares have not yet jumped higher as a result, it can be assumed that the price of the penny stock will soon jump higher as well. Transversely, if OBV illustrates net selling pressure, it can be assumed that the shares of the penny stock are likely to fall.
OBV can be displayed by just about any free charting web site. You will see that the OBV line for any penny stock will very often mimic or lead the price activity of the underlying penny stock. An upward swing in OBV will appear very similar to an upward swing in the price of the shares, while a drop off in the shares may follow or appear concurrent with a drop off in OBV.
When investing in any equities, it will benefit traders to check on the OBV direction. If you know that a penny stock has significant capital flows going into or out of it, your investing outlook may be somewhat changed.
Keep in mind that OBV will be displayed in terms of the full time frame of the underlying trading chart. A one year chart will display OBV for the full year. OBV in penny stocks is best utilized over time frames of three months or less, preferably even a single month. You want to see the flow of capital in recent months or weeks to get an idea of the recent money flows, because in penny stocks that will be what has the greatest short term impact.
While OBV is a useful TA indicator for investing in any type of stock, it is especially useful for penny stocks and investing in low-priced shares. After all, money flows into (or out of) smaller companies will have the most significant impact.