Finding small gains on penny stocks is as easy as reading a chart and watching for a breakout of a technical pattern, but if you are looking to find the next explosive penny stock that could skyrocket into the mid or large cap stock range, you are going to have to look at a number of factors and determine scientifically if this stock is prepared to explode.

Word to the wise: don’t get carried away in anything anyone might refer to as a sure thing. Real traders know that there is no such thing as a sure thing, so hedge against failure by diversifying your trades well enough that one trade will not seriously injure your account. If you put your life savings into a penny stock that ends up losing money, you will feel about how you should’ve felt from the very beginning of the ordeal: stupid. So be excited that you have the opportunity to multiply your investments, but don’t put up the entire nest egg in one trade or you could most definitely end up losing it.

Here’s just a couple of the most important factors you want to look for when trying to pick the next explosive penny stock:

-Increasing Revenues and Earnings

Companies that are publicly traded typically release an earnings report every quarter to illustrate their financial performance. Keep track of this on any stock you believe has the power to transform in value and look for a trend of increasing revenues and better earnings for the company. This means the company is growing, even if the stock is not yet going up.

-Decreasing Debt to Equity Ratio

Companies that are preparing to break out of a shell and transform into a wealthy multi-billion dollar conglomerate are typically very good at handling and reducing debt. A company that can quickly and easily pay out its debts and start building equity in the markets has a very bright outlook for the future and should attract value investors from around the world.

-Competitive Advantage

The company you are looking at should have a competitive advantage in the markets. A particularly promising way to insure this might be to look for a company that has a niche in the market no other company is effectively filling. This usually can be translated into some form of technology no other company has refined or a style of business no other companies are mastering.

-Industry Conditions

Take a look at the overall market and find what the most promising industries for growth based stocks are. If the sectors with the current highest levels of growth are the same as the sector in which your penny stock is located, it’s a good indication that this stock has potential.

-Price/Earnings Ratio

A company with good earnings is a company that does good business, but if a company does good earnings and is underpriced, you are looking at a great opportunity to buy! A low price to earnings ratio at or below 15 can mean that no one else is aware of just how valuable this stock is, which makes it a perfect buy for a value trader.

-Technical Pattern of Congestion

Typically before a penny stock breaks out of a previous resistance level, the stock undergoes a pattern of congestion in which price action compress, often times taking on the form of a pennant or flag. Watch for these technical patterns and buy when the time is right by waiting for the breakout to confirm. Here’s an example of congestion:

Jayhawk Energy Incorporated compressed at the base of a trough right around Christmas and was immediately followed by a significant breakout of the pattern. Given the fact that this penny stock had just announced new acquisition of oil drilling and natural gas mining territory in North Dakota, it was clear that a breakout was due to occur at some point.