Over the last several days, we have seen quite a jump in small-cap stocks in a short period of time.
This doesn’t mean my bullish approach is coming to an end…
It simply means we are currently overbought on a short-term basis due to the big move over the past few days.
As I may be pumping the brakes a little on buying as many longs, I am starting to keep an eye out for another opportunity that may pop up.
You see, some of these small-cap stocks had a multi-day trend upwards, and it’s only a matter of time before they crash back down to earth.
Let’s face it, penny stocks aren’t something you want to hold onto for the long run…
I trade them because of their volatility, giving me the opportunity of making a quick profit without holding onto a specific stock for an extended period of time.
I just don’t trade penny stocks in hopes that they go up, every decision I make is based on patterns I have studied over the last 20 years.
Patterns do work for traders, as long as you study and are able to recognize them.
So today, I want to show you how this one pattern should look and how to trade it.
Table of Contents
Key Patterns
Many of you may be asking… What are the best patterns out there?
There are several patterns any trader can choose from, but you need to find the ones that best fit your trading style.
It doesn’t make you a better trader if you know more patterns than someone else…
What makes you a better trader is being an expert in just a few key patterns and knowing how to spot them.
Every day I look for the same patterns, regardless of what the market is doing…
When a stock starts to move, it can create shapes, trends, and other visual cues.
When you become good at reading charts, it paints a picture of how the stock is doing.
But unfortunately, some traders can’t be convinced that focusing on specific patterns is key to their success…
All they want to do is chase runners at high prices and they have already made their move…
This is very dangerous because, with these penny stocks, we aren’t trading them because they are good companies…
We are trading them because these key patterns have been proven to be successful if you master them.
Understanding Right From Wrong
When you study or learn anything in life, you want to learn it the right way.
Think about it, if you are lifting weights incorrectly you can hurt yourself…
The same thing applies to trading, if you are studying and learning the wrong way, it can be devastating.
I recommend all new traders practice how to spot these patterns and the best way to practice is by using a paper trading account.
But today I wanted to show you an example of what is not a multiday uptrending play, and how to recognize the difference between dip buys.
Cloudweb, Inc. (OTC: CLOW)
Earlier in the week, we saw CLOW have the perfect bounce and I sent this to all the traders in the chat room…
Understanding the morning panic is something I encourage all of my trading challenge students to learn.
Why? This is one of the few key patterns that are highly reliable.
So what exactly creates the perfect scenario for you to dip buy?
First, you want to have a stock that is a multi day runner, has volume, or has broken through a recent key resistance level.
These types of stocks that have a massive gain in a short period of time, end up having those early morning panics…
But there is enough volume and interest from traders that can help bump the stock back up after the panic sell-off.
Let’s take a look at what this would look like…
Here you can see the stock panicked in the morning, but then rebounded to the price where the stock opened…
Before the volume fizzled out. These are the classic morning dip buys you are looking for.
With any dip buy, you may ask, what helps you determine when to buy.
Well, I am always looking to see where there is recent support for the stock to bounce from…
And then I plan on selling into strength.
Below you can see CLOW continues to trend upwards, which makes it why this is a multi-day runner.
Inotiv, Inc. (NASDAQ: NOTV)
Early yesterday morning, I mentioned in our chatroom for students to recognize the difference in dip buys…
So what do I mean by that?
Let’s take a look at the daily chart for NOTV…
Notice that it has been on a constant downward trend over the last several months…
But yesterday, the stock had a massive sell-off, sending the stock to a 52-week low.
These types of stocks aren’t trends that I look for because frankly, the trading opportunities aren’t there.
Let’s look at the one minute chart for NOTV…
Granted the stock went down almost 50% on the day…
But it doesn’t have that morning panic where the stock plunges 50% within the first 30 minutes after the market opens.
So when you are looking for a dip buying opportunity, look for those multi day runners and those quick panics in the open…
Not the ones that are gradually trending downward with no positive sign that it’s going to bounce.
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Final Thoughts
It’s important to understand that you aren’t going to find multiple trades every day…
And that’s not what trading is all about.
It’s about how you can profit from well-executed trades.
No one likes to lose money, who does?
But it’s all about taking small quick profits, recognizing these patterns…
And cut losses quickly if things don’t work as planned.
It’s going to take time to recognize how these patterns work and how to spot them, but over time you’ll be able to spot these patterns in your sleep!
Enjoy your weekend, and STUDY up!
Tim
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