Why Volume Matters in Penny Stocks

When trading penny stocks, one of the most important things to look at and analyze very carefully is the patterns in volume spikes. This means taking the time to figure out what is driving the market momentum and what each spike means for future price action. The best way to do so is to take a look at past price action and verify that it falls in line with an expected trend.

Keep in mind that strong fundamentals are key to balancing out any technical indicator you observe. A stock with weak fundamentals such as a bad debt to equity ratio or declining earnings reports will likely not behave in a manner that is appropriate with expected patterns. So any pattern you observe on a poorly managed stock cannot be accurately read for future price motion.

That said, when looking at volume patterns, take a look at previous price action. One of the largest spikes on this stock happened at the very bottom of a significant double down where support could not successfully be breached. This is extremely important because if a volume spike occurs on a pattern such as this, the following uptrend is likely to be a large one.

And in this situation, the pattern came true out of what the price appeared to be indicating. The volume spike showed that it would likely make a huge increase in price action upwards because of the massive buzz in trading activity combined with what is an obviously bullish formation on the charts. These two in conjunction with each other are what makes volume spikes significant when doing technical analysis. Any particular formation is a big deal whether it be bearish or bullish, but if a massive volume spike is added into the mix, it’s likely the pattern will follow through in an extreme result.