Wednesday, December 23, 2009

Why trade low volume stocks?

First, let me say that trading a stock with low volume is not a complete investment strategy. It is a strategy that should be used in combination with a comprehensive approach to long term growth.

But it can be very profitable. This blog will tell you how to spot investment opportunities and profit from forgotten corners of the stock market.

Spotting the Trend

Technical traders like to read charts like tea leaves. Spotting low volume trends, however, defies some of the conventional thinking about technical analysis.

For one, since low volume stocks do not trade as often or as quickly, longer term trends are more helpful than shorter term trends. For this reason, when I begin my analysis, I begin with a 6 month view and run a 200 day moving average through my chart.

Low volume stocks tend to hover around this moving average for months on end. The key to a profitable low volume stock is one that fluctuates around this moving average with a large enough swing that one can buy low and sell high (or short the stock accordingly).

Notice that low volume stocks have a huge spread, so patience is key. Sometimes an order will have to be open a long time to be completed, but every low volume stock goes through periods of higher volumes. Cashing in and out during those periods makes the patience pay.

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