When trading penny stocks, one of the things you notice is that volume spikes typically play a pretty big role in forecasting future movement of stock price. When there is a massive spike in volume, it is quite likely the stock will experience future changes in the direction it is looking to advance, whether it be up or down. The tricky part is finding out what direction it was previously headed and using that as an indicator of how to read a volume spike.

With penny stocks, volume spikes are a critical indicator. They show that the hype and mania towards a stock has reached a boiling point with thousands or perhaps even millions of traders suddenly moving into a previous unexplored market. This is usually the result of news and information that has recently come out and attracted people to this spot in the market.

If you look at the chart on the left, LFBG had a huge volume spike right before advancing significantly in price. This actually happened numerous times throughout the course of its rally these past few months, and this is just an example of one of the spikes that occurred. The spike was a part of an already advancing stock. In combination with strong fundamental indicators such as earnings reports that were coming in, a lot of good news was happening on this stock, so the sudden upturn in volume actually became a very positive indicator.

Just be warned, this can also be a sign of the opposite in the wrong situations. Stocks with a lot of negative news can spike in volume as a sign of massively increased selling volume. Volume is just a signal that indicates how many people are trading the stock. It doesn’t show who is buying and who is selling. The only way to determine that is to look at the price action.

So before jumping in on a volume spike, make sure it’s a positive indicator by checking the fundamental data associated with it. This will help you guarantee that your trade won’t go to waste by false analysis.