As I continue to work on developing my risk management/entry/exit strategy for pennystocking based on the Trend Following ideas, I have been brought to consider some of the main differences between the former and the latter.
First of all, is the obvious difference in pace: Trend Following focuses mainly on price variations extending over multiple months in order to generate returns, while pennystocking focuses mainly on intraday variations sometimes extending over a couple of days at the most; kind of like a Paris-Dakar vs F1 race (or a marathon and a sprint).
More importantly, Trend Following trading focuses only on technical analysis and more specifically exclusively on price action while penny stocking is kind of a hybrid between technical analysis and fundamental factors that will affect the price intraday.
The point I want to make today is that, while trend following is at its peak efficiency when doing purely technical analysis and following a precise and rigorous set of rules in terms of entry and exit, pennystocking seems to rely on some fundamental factors that act as catalysts pushing the price in a certain direction which ultimately dictate the entry point.
That being said, some ideas of trend following could in fact be applied to penny stocking, which is what I am using as a basis to work on the development of my current strategy. Here are some of the concepts that caught my attention:
- Using multi-day high/lows as trend lines (read support and resistance) which will act as signals for entry and possibly exit
- Establish position size as a function of acceptable risk on equity value and Average True Range
- Pre-establishing stops based on a multiple of the ATR as well as key support and resistance for a certain period
- Describe position value in terms of units (risk to total equity) and ATR
- Entry price is not as important as exit price since it is impossible to predict how long a trend will last – in order to assess this, Timothy Sykes usually sets a $/share amount goal on every trade he makes. I personally think that while it is usually a safe way to approach it, it also limits greatly potential profits.
Additionally, there is a growing need for me to establish clear entry rules for my pennystocking strategy; this so far has been quite elusive and has been the focus on my past couple of days (kind of an electron cloud, you know it’s there but you can’t really see it)
I am still in the process of establishing some of these values in order to make my risk management strategy comfortable to my style as well as profitable.
There is obviously a need in pennystocking for fundamental factors in order to determine immediate price movement, therefore a purely technical analysis, while possible, may be quite difficult considering that such stocks are often erratic in their price action; also is the fact that since penny stocks tend to move quickly when they do, and do nothing when they don’t, it makes it a bit harder to find potential candidates when nothing significant is happening.
The reason for this is that lots of penny stocks are mostly worthless, so it is hard to know when they will move unless there is some type of catalysts that promotes this motion up or down; tracking all of them based on purely technical factors would be very time consuming – this is where fundamental factors and chart patterns come in handy, as they filter out all the candidates that are not worth paying attention to at any given time until they become ripe enough for consuming.
My current challenge truly lies in figuring out these breakout/breakdown lines that will used as entry signals for my trades; I have the exit strategy figured out for the most part, but I am still planning on doing some back testing to validate my research through simulated experimental results with previous existing data. My next step is probably to watch the market and simulate entries and exits with real time motion and assess my results.
I’ll share some more as I progress.