Investing > Complete Guide to Penny Stock Patterns

Complete Guide to Penny Stock Patterns

Trading penny stocks is fast-paced and frantic—but penny stock patterns can give you a good idea of what to expect.

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Updated June 10, 2021

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Don’t you wish you had the power of foresight when trading?

We’re not talking about full-blown prophetic powers here—just a tiny little hint as to the next move of that shiny new penny stock you found.💡

Well, to a certain degree, you can attain that ability. There’s no mysticism behind it, and it involves a lot of effort and research—but it’s there. We’re talking about technical analysis—more specifically, penny stock patterns.

To make a long story short, fundamental analysis doesn’t work too well with penny stocks. There just aren’t enough sources to base a strategy on. You shouldn’t follow the social media hype regarding penny stocks—that’s a disaster waiting to happen. So, what do you do then? You look at the stock’s past performance, try to identify patterns, and hopefully when they appear again, you’re in a position to utilize the knowledge of what will happen.

That might sound a bit intimidating, and as if you’re going to bite off more than you can chew—but there’s no need to go in blind. Stock trading patterns are something that the investing space has known about for years—and there’s a lot of trial and error backing up the most well-established patterns.

We’re going to explain everything as clearly and simply as we can—and seeing as how this is quite a technical subject, we’re going to try and illustrate with plenty of charts and graphs. If you don’t quite get everything after the first pass, don’t worry—this is complicated stuff.  However, it is essential if you’re going to have any hope of trading penny stocks successfully, so let’s chart a course toward success.

What you’ll learn
  • What are Penny Stock Patterns?
  • Important Characteristics
  • The Importance of Stock Patterns
  • Types of Penny Stock Patterns
  • Penny Stock Pattern Examples
  • Risks of Penny Stock Patterns
  • Before Starting, What You Need to Know
  • Conclusion
  • Penny Stock Patterns: FAQs
  • Get Started Trading Penny Stocks

What are Penny Stock Patterns? 🔎

Let’s start from the very beginning—what are stock patterns? To understand this concept, we have to take a step back and talk about technical analysis.

If you’ve read some of our other guides or educational articles, you’ve no doubt come across the term fundamental analysis. Fundamental analysis looks at a company’s financial statements in an effort to determine its real value, and therefore, the fair price of its stock.

However, technical analysis is talked about much less frequently. With penny stocks, there isn’t much publicly available information available, so fundamental analysis isn’t really possible—which means that the only remaining option is technical analysis.

Technical analysis uses statistical data—information available regarding the price and trading volume of a stock during a certain period of time to ascertain how the price of the underlying security will behave in the future.

While technical analysis certainly isn’t foolproof, looking at the data regarding how a stock trades does allow you to see certain patterns—all of which have their own rules, and which imply that a stock will behave in a certain way in the short-term or the long-term.

Once you’re familiar with these patterns (and trust us, there are quite a lot of them), you will have a whole new tool at your disposal to find and identify trading opportunities—provided that you already know how to read and understand a stock chart. Patterns can give you a good idea of when you should buy a stock, but they can also give you a clear signal that things are about to head south and that you should sell.

Penny stock patterns behave in the same way as regular stock patterns—however, seeing as how penny stocks are specific in quite a few ways, there are also a couple of differences in how you can and should apply these patterns to your trading activities.

What’s Special About Penny Stock Patterns? 👇

To really get into the gist of why and how penny stock patterns are different, we need to first talk about the characteristics that set penny stocks apart from regular stocks.

First and foremost, quite obviously, is the price of the stocks. Regular stocks aren’t liable to see huge swings in stock price (disregarding the odd extraordinary occasion)—however, this is quite a common sight when it comes to penny stocks. This change is reflected in penny stock patterns—put simply, with penny stocks, everything about the trading experience is amplified.

There’s also the question of volatility. While penny stocks can shoot up in price, they can also see dramatic reductions in stock price—and unlike regular stocks, the risks of bankruptcy and total failure are ever-present. If you invest in large-cap stocks, sure, you can lose a bit of money—but your trading account won’t go to zero—with penny stocks, that is a distinct possibility.

What this means for penny stock patterns is that you should take any and all negative signals much more seriously. Penny stocks can be a great opportunity if you practice proper risk management—if you don’t, you’re just playing with fire. A chart pattern that would signal a small, temporary setback in the case of a regular stock can quite easily signal complete ruin when it comes to trading penny stocks.

Unlike regular stocks that almost always maintain quite a healthy baseline level of trading volume, and as such have no problems with liquidity, most penny stocks don’t see a lot of trading activity. However, this has changed somewhat in recent years, with an overall boom in penny stock trading—however, the differences are still easy to spot.

This fact implies two important things to keep in mind—one, selling penny stocks is harder than selling regular stocks, and two, where there is smoke, there is fire—when you see a penny stock with a healthy trading volume, a significant price movement is bound to happen.

Why Penny Stock Chart Patterns are Important 💡

Penny stocks are known far and wide for their volatility. Although this is often considered a drawback, it isn’t so simple—great volatility is also a sign of great profit potential—provided that you can properly analyze the stocks in question.

However, penny stocks do suffer from one enormous drawback—there’s a lot less information available on them for investors to go on when making a decision to buy. The requirements for listing a penny stock on the OTC markets or the pink sheets are much less stringent—there are far fewer financial statements available for the public to analyze. 

This brings up an important point—security, as penny stocks are a popular vehicle for scams—but it also has implications for trading.

What this means, in practice, is that fundamental analysis cannot be done properly for a good deal of penny stocks. Without a clear overlook of the direction the company is heading through their financial statements, investors are left with only one choice when it comes to analyzing penny stocks—and that is technical analysis.

Technical analysis is impossible without stock chart patterns. Seeing as how this is the only lens through which you can get an idea of which penny stocks are promising and which are not, knowing how to read a stock chart and how to analyze patterns is non-negotiable.

Without using penny stock chart patterns, you can only go in blind—this is little more than gambling, and is a bad idea even with regular stocks—and with the added volatility and rapid-price changes common to penny stocks, it’s an even worse idea in this scenario.

Technical analysis and analyzing stock chart patterns are important even when you’re investing in blue-chip companies. They’re simply a part of due diligence—however, when trading penny stocks, they are absolutely essential, as they offer a way of gauging investor sentiment.

Types of Penny Stock Patterns 📊

There are plenty of penny stock trading patterns—in fact, some expert traders have their own patterns that they use, owing to years of experience and trial-and-error.

Be that as it may, we’re starting with the basics, so we’re going to cover the most common, conventional, and universally recognized penny stock trading patterns. Stock chart trading patterns, in general, can be divided into four categories.

Continuation and Reversal Patterns 🔁

First, you have continuation patterns. Continuation patterns tell us that the trend that we’re seeing is going to continue. However, continuation patterns can only be seen during a period of consolidation. Sounds confusing? Let’s break it down.

A penny stock’s price is showing steady increases. At some point, it enters a period of consolidation—prices still fluctuate, but they stay within a certain range. If you spot a continuation pattern at this point, it is likely that the stock will continue to rise in price when the consolidation period is over.

The second category is reversal patterns. As you might’ve guessed, they tell us that the opposite is about to happen—after a period of consolidation, the trend that we’ve been seeing is about to reverse.

Japanese Candlesticks 🕯

Although they deserve to be covered as a separate topic (and we have covered them) Japanese candlestick charts offer an entirely different approach to charting stocks. For now, stick with the basics—once you’re confident in your knowledge in this area, you can and should also study Japanese candlestick charts—and they come with their own patterns.

typical Japanese candlestick chart
A typical Japanese candlestick chart. Image by TradingView.

Bilateral and Breakout Patterns 📈

Bilateral patterns aren’t considered as important when trading regular stocks, because they show an equal amount of buying and selling pressure. With these patterns, this could go either way—but because penny stocks are so volatile, you’re going to be seeing them quite often. The specific patterns that fall under this category can tell you whether to expect a reversal or a continuation of the trend that you’ve been seeing up to that point.

And finally, we have breakout patterns. These patterns rely on the key concepts of support and resistance. Support shows us the price that the stock hasn’t gone below—and resistance shows us the price that the stock hasn’t risen above. Breakout patterns occur when a stock breaches either the support line or the resistance line combined with higher trading volume—and they signal the beginning of a new trend.

Penny Stock Pattern Examples ✅

Now, let’s move on to some examples. We’re going to list six commonly seen stock chart patterns that can commonly be seen with penny stocks. Although they are useful tools, remember—you have to keep in mind that without a good idea of the stock’s media coverage and trading volume, it’s impossible to use these chart patterns.

Support and Resistance 🎯

We’ve already mentioned support and resistance lines, and we’re going to begin with them here. Support, resistance, and breakouts are concepts that are used to identify a lot of other stock chart patterns, so getting a feel for and visualizing them is important before we go any further.

support and resistance lines
Caption: A graphic representation of support and resistance lines. Image by TradingView.

Support and resistance patterns can tell us when a new trend has taken hold of a stock. The support line tells us what price the stock hasn’t traded below, and the resistance line tells us the price that it hasn’t traded above.

Now, keep in mind, these lines aren’t set in stone. If a stock goes over either of these lines but sees a correction in the next couple of days, this isn’t a case of a support/resistance breakout pattern. However, if the price holds steadily above or below one of the lines for a couple of days, together with an increase in volume, you might be looking at the beginning of a new trend.

Bull Flag 🐃

The bull flag is one of the more commonly seen continuation patterns—it signals that the trend that could be seen up to that point will continue. Bull flags occur when stocks see a large increase in price—meaning that they’re all the more common when trading penny stocks.

bull flag pattern
Graphic representation of a bull flag pattern. Image by TradingView.

After a sudden increase in price, the stock will enter a period of consolidation. The initial increase is referred to as the flagpole, with subsequent consolidation swings forming the body of the flag.

If sufficient volume is present, a bull flag pattern can even signal a breakout—however, for this to happen, a couple of requirements have to be met. First, the initial rise in stock price should be rapid and accompanied by volume, and the consolidation period that follows shouldn’t see price swings that are too dramatic.

Golden Cross 🏆

The golden cross is a special case. It isn’t a chart pattern so much as a lagging indicator—it cannot be used to try to predict trends, but it can be used to confirm trends, which can be just as important.

golden cross pattern
An example of a golden cross pattern. Image by TradingView.

The golden cross relies on two metrics—the 50-day simple moving average and the 200 day moving average. Once the former crosses over the latter, you’ve got a very strong bullish signal on your hands—one which usually points to a very strong uptrend.

Double Bottom 📉

The double bottom is a reversal pattern—and reversal patterns indicate that the trend that has held true up to that point is about to reverse. So, what is a double bottom pattern? It happens when a stock’s price reaches the same low twice in a short amount of time—but after that, it starts increasing in price.

double bottom stock pattern
A graphic representation of the double bottom stock pattern. Image by TradingView.

The double bottom resembles the letter W when looked at—making it one of the easier patterns to recognize at first glance. The best moment to enter a position is after the stock experiences the second low—however, keep in mind that you need a fair amount of trading volume to confirm that bullish changes will continue.

Cup and Handle ☕️

The cup and handle is another classic continuation pattern that is easy to spot. An increase in trading volume and price is followed by a decrease in both price and volume—after that, the stock price and volume continue on a gradual climb, followed by another period of lowering prices preceding a breakout.

cup and handle stock chart pattern
Graphic representation of the cup and handle stock chart pattern. Image by TradingView.

After the initial spike, the decrease in volume and price forms the bottom of the cup. When the stock price and volume pick up pace again, the cup forms its right side—and the subsequent small decrease in price forms the handle.

The decreases in price shown in the handle period shouldn’t venture more than one-third into the cup. In general, the shorter the handle, the better the signal—another sign to look for is volume that keeps pace or rises consistently from the bottom of the cup to the very end of the chart pattern.

The Risks of Using Penny Stock Patterns ⚠️

So, what are the risks of using penny stock patterns? Well, there are no risks associated with using these patterns per se—however, some traders do tend to over-rely on them, and this can easily lead to a dangerous case of tunnel vision.

While fundamentals are scarce when it comes to penny stocks, this doesn’t mean that they can’t be found or that they don’t have an effect on the stock price. While it’s much more difficult to do a complete fundamental analysis of a penny stock, it is sometimes possible—and even when it is not, you should contrast all of the findings that you get from technical analysis with any available fundamentals.

If you see a glaring red flag in the stock’s fundamentals, staying away from it even though the stock chart patterns are promising might be a wise choice.

To put it in the simplest of terms, stock chart patterns are very useful—but they aren’t a fool-proof way of predicting the future. If you only rely on them as a source of information, you are going to be blindsided from time to time.

In particular, penny stock prices are highly susceptible to press releases—whether it’s an earnings report, news of a merger or acquisition, or plain old positive or negative media coverage, all of these can and do have huge and rapid impacts on the stock price.

If you rely solely on stock chart patterns and disregard the media coverage of the penny stock in question, you’re in for a bad time. You should always stay on top of the news regarding the companies that interest you—that way, you won’t simply be reacting to price changes, but actually acting and actively participating.

What You Need to Know When Using Penny Stock Patterns ⭐️

First and foremost—if you’re new, do not start trading penny stocks straight out of the gate. Even if you’ve been studying and reading for months, and already know dozens of stock chart patterns by heart, you will still be exposing yourself to a lot of risk. 

Instead, open a demo account with any of the top penny stock brokers—this will give you plenty of valuable first-hand experience that can’t be acquired elsewhere. This way, you’ll be able to try out different platforms, test strategies, and see how penny stock patterns play out in the real world—without having to risk money to figure that out.

Now, let’s move on to the penny stock patterns themselves. Technical analysis is indispensable for trading penny stocks—and stock patterns are indispensable for technical analysis. However, always keep in mind that none of this stuff is gospel—past performance isn’t an absolute guarantee of future performance.

The fact of the matter is that technical analysis works best when there is plenty of stock trading volume. With penny stocks, this often isn’t the case. So, are there any alternatives? No, but keep an eye on the news, and don’t disregard any of the fundamentals that you can find about penny stock companies.

Another important thing to keep in mind is that you have to keep a cool head. Penny stocks are very volatile, and their price changes rapidly—in many cases, you’re going to have to act quick, and those split-second decisions will have big consequences. You’re going to have to have a rock-solid understanding and mastery of market psychology to know how to effectively utilize the information that you can figure out from looking at a penny stock chart pattern.

Conclusion 🏁

So, there it is—we’re at the finish line. We’ve gone over the basics of penny stock patterns, with plenty of specific details but without going into too much nitty-gritty minutiae. We hope you’ve found this article enjoyable and easy to understand.

Stock chart patterns might seem a bit intimidating and far too technical at first glance—but they’re simple once you get the groove of it, and can even be fun and engaging in a creative way. This is an important piece of knowledge going forward—and it is absolutely essential for penny stock trading—so keep at it, because mastery of this subject is something you can’t put a price tag on.

Penny Stock Patterns: FAQs

  • Do Penny Stocks Follow Patterns?

    Yes—provided that there is enough trading volume present, penny stocks exhibit much of the same chart patterns as regular stocks do.

  • Can You Get Rich off Penny Stocks?

    You can make plenty of money trading penny stocks—however, this is a risky endeavor and requires a lot of patience, experience, and research. It is possible—it just isn’t easy.

  • What are the Best Indicators for Penny Stocks?

    In general, paying attention to support and resistance lines, combined with a keen eye for stock chart patterns and increased trading volume will bring about the best results when trading penny stocks.

  • Do Penny Stocks Follow Technical Analysis?

    Yes—in fact, technical analysis is often the best way to analyze penny stocks because they lack publicly available fundamental data. However, technical analysis works best when there is plenty of trading volume present—keep that in mind, as technical analysis is less reliable for penny stocks with low trading volumes.

  • Was Apple a Penny Stock?

    Although Apple is often mentioned as having once been a penny stock, this is a misconception. The SEC defines penny stocks as those that trade under $5 per share—because of Apple’s stock splits, it might appear as if it was once a penny stock—but once you adjust the price, Apple’s historical low is around $8.

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Beginners and mutual fund investors

Active traders

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