Strategy to Determine Best Penny Stocks To Buy

Penny stocks are attractive to a number of investors and traders because the share price is much lower than the average stock. The low share price allow the trader to buy more shares of the particular company and as a result have the opportunity for a larger potential profit. If you couple this with the fact that penny stocks are more volatile and can make large jumps in price, you can see why many people are attracted to penny stocks. But in order to be truly successfully you need a strategy to determine the best penny stocks to buy.

There are a number of people that want you to believe that you should approach investment in penny stocks just as you would an investment in any other stock. However, there is tremendous fault in this logic. If you were to take a Warren Buffet like approach to penny stocks you would never buy one of them. Penny stocks are not dominant players in their industry, they are not well capitalized, they do not have competitive advantages. Stop pretending that they are something they are not. You can find penny stocks that have very little if any debt but I don't know how many of the other fundamental statistics I would follow.

I have seen people try to do fundamental analysis on penny stocks but it is usually not too effective. There calls can be right for short periods of time but usually the penny stock share price will crumble yet once again. Why? Because that is the nature of penny stocks. They are not long term investments so do not treat them as such. They are short term trading vehicles that if played correctly can make you a lot of money.

The best penny stocks to buy are companies that are beginning a new upward trend. One of the best ways to know if a stock is beginning an new upward trend is to look at a significant moving average. Now long term investors have a tendency to want to look at 100 day and 200 day moving averages. I don't believe these work all that well with penny stocks. As I have mentioned penny stocks are short term investments. The longest moving average that I would use is a 50 day moving average. However, I prefer something along the lines of a 21 day moving average.

If the penny stock breaks above the 21 day moving average (or the moving average of your choice) it is very possibly establishing an upward trend. I would go buy the stock when this occurs. I would feel more comfortable if this move was accompanied by higher than average volume or if the stock has just broken through an area of resistance as well.

However, as with any penny stock strategy you have to be ready to close the trade at a loss if it begins to move against you. Not every penny stock you breaks above a moving average will continue to move upward. But if you keep your losses small you will run into those stocks that make large moves after you have bought them. Most of your trading profits will come from these trades.

The best penny stocks to buy are those that are establishing new upward trends and not those whose fundamentals may look better than other companies.