OTCPicks Penny Stock Blog

Chart patterns. Though often confusing to the average trader, the patterns signal profits with regularity. Mastering chart patterns is key to your success as an investor, and at OTCPicks.com, we are always looking for ways to educate the average investor. Below are 5 chart patterns you need to know:

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1 - Symmetrical Triangle.

Symmetrical triangle patterns are seen when the stock being charted achieves increasingly higher daily low trading prices, while at the same time exhibiting lower intraday highs. This pattern of activity forms a triangle that is symmetrical in nature. Emergence of a symmetrical triangle most often indicates a range-bound stock without a definable market sentiment.

Symmetrical triangles are very useful for swing traders looking for a defined range of a given penny stock. Stocks remaining in this sort of channel present ideal opportunities to buy them when they hit the bottom of the range, as well as sell them short when they approach the top end of the range.

A symmetrical triangle is generally regarded as a period of consolidation before the price moves beyond one of the identified trendlines. A break below the lower trendline is used by technical traders to signal a move lower, while a break above the upper trendline signals the beginning of a move upward. As you can see from the chart above, technical traders use a sharp increase in volume or any other available technical indicator to confirm a breakout beyond one of the trendlines.

2 – Double-Top pattern.

A double-top pattern reflects its name. It occurs when a penny stock reaches a given high twice but falls off it each time. This creates a pattern within the chart of two "humps," both leading downward after the peak. Recognition of double tops can be mastered by beginner technical traders, and they serve to send a powerful signal.

Emergence of a double-top pattern is a bearish signal, which can foreshadow price per share decline. Those holding a given penny stock position are wise to sell it should a double top pattern be seen. Similarly, a double-top pattern can be a trigger signal for selling short a given stock. As indicated, whether the signal is valid or not, many sellers are bound to enter when it appears. Smart traders will execute their trades first.

3 – Double-Bottom Pattern.

A double bottom is the opposite of a double top. On a chart it most often appears to resemble the letter "W.” There are two valleys each forming a bottom with subsequent price recovery. It is important to analyze share volume within the context of a double bottom pattern. Ideally, one sees higher daily volumes during the upswing legs and opposed to the down trend lines.

A double bottom is thought to indicate that a floor to the price-per -share has been achieved. This allows for those seeking to own the stock to have a good entry point, as well as those who have shorted it a signal that it is time to cover the position. The challenge is to recognize this chart pattern as it is forming. As indicated previously, when it comes to penny stock trading the early bird catches the worm.

4 - Ascending Triangle.

Ascending triangle patterns emerge when the penny stock being charted is in the process of increasing its daily low trading price while the daily high remains static. The existence of an ascending triangle pattern most often signifies a positive trend regarding the price per share of the penny stock you are analyzing. However, it is important to note that there are exceptions to this rule.

Should an ascending triangle present itself during a period characterized by price-per-share decline, then this pattern can serve as confirmation of projected weakness in the stock's price. It is important to differentiate between ascending triangles seen during bull runs versus those noticed as a price reversal starts to ensue.

An ascending triangle is generally considered to be a continuation pattern, meaning that it is usually found amid a period of consolidation within an uptrend. Once the breakout occurs, buyers will aggressively send the price of the asset higher, usually on high volume.

5 - Descending Triangle.

Adescending triangle pattern is associated with the situation when a penny stock's daily lows remain static while its daily highs decrease. It is called a descending triangle because of the descending nature of the daily high trading price-per-share. When this pattern emerges during a time of price-per-share decrease it can serve to predict further weakness in the stock.

However, when the descending triangle pattern emerges after an apparent reversal of price declines, then it can conversely serve is verification of future continuing stock strength. It is critical to analyze descending triangles within the context of the trend your stock is exhibiting. Failure to do so could result in making the exact opposite trade as the given chart dictates.

Descending triangles are a very popular tool among traders because it clearly shows that the demand for an asset is weakening, and when the price breaks below the lower support, it is typically a clear indication that downside momentum is likely to continue or become stronger.