Sure, they move further and faster. Fear of failure drives many traders, look at the exit on close of daytraders, the same fear exist with stocks that move faster than their capabilities. The TA is the same, you just get more bang for the dollar. What is illiquid to you? You don't run a mutual fund, do you?
I understand what you are saying here. And if you properly filter out the charts that are too "volitile" and "spurious" because they are illiquid or have the price action of illiquid stocks, then I can see the validity of your point. What I am saying here is that there still are stocks to avoid in the low price category that IMO makes the workable application of TA at the very least different, if simply not feasible.
So I think this comes down to two different but related issues to the trader. One is that of volitility related to illiquidity. Heck some of these stocks have zero volume days like other illiquid stocks. The other is volitility (or lack thereof) related to the trading activity (or lack thereof) on the stock. For instance, I am saying that it appears to be the nature of many low priced stocks to just sit there and do nothing. I agree that TA and tape action can be useful here in determining if a particular stock is a good candidate for a short term trade with respect to the qualities like this which small priced stocks can exhibit. When some of these stocks do move, their action is lets say more "spritely". This type of stock would warrant close observation. I do not think this would be a good choice for a person who only periodically looks at the charts through the week.
Perhaps I have not seen a good sample of low priced stocks, but I remember the volitility of some being way out of the norm from the stock that I normally deal with. Fitting trendlines to them would be difficult or simply not workable. And so much for OB/OS indicators. I think this is also explains the difference between what we have been seeing in relationship to the stocks price action and its BBs. In the stocks that I follow, I rarely have seen a stock move and stay outside of its Bollinger Band. This includes the more volitile stocks that I have come across. I have been able to develop some rules from this observation that would not apply to the stocks that you follow which can remain outside of their BBs for a period of several days. They behave differentlyl wrt their BBs. So at the very least, the low priced stocks would require a modified approach to TA and trading. I am also suggest that some of the low prices stocks would not lend themselves well to TA. I am aware that you, Richard, have specific criteria and filters used in the scanning process that may allow you to avoid this type of low priced stock.
It is easy for an average individual to buy many shares of a low priced stock. An individual trader's purchase power, so to speak, is highly magnified withthis type of stock. I have used $20,000 in purchases of a particular stock before. This can have me end up with 1000 shares. On a $2 stock, this would be 10,000 shares. Unless the "penny" stock has a very large float, many people like myself doing this can lead to periods of illiquidity in the stock. So I can see the possability that I do not have to be a mutual fund in order to run into problems with this type of stock. In cases like this I would have to approach the purchases and sales of the stock differently from that of higher priced stocks. Does you experience with the low priced stocks support this thought of mine?
As far as the reasons many people use to purchase a low priced stock, I understand they had nothing to do with TA. However, one of my fundamental observations of stocks is that the price action, or behavior of a stock is determined to a very large extent by the type of players trading in the stock. So as an extention of this concept, if you have a stock that is attracted by the risk seeking traders, which is what I suggested that happens frequently with low priced (penny) stocks, where it is well within their means to pick up 1,000, or 5,000 shares of stock, I think this will have its effect on the price action of the stock.
My thought is that this type of stock that is actively followed by this type of player will be much more volitile, will have periods of quick moves or steep inclines in the price of the stock which can become very overextended (overbought) very easily and remain that way for a period of time. Then a time can come where this stock can just as quicly drop. It is this spectrum of greed to fear that I am thinking can show up more distinctly with low priced stocks. This is an issue that is seperate specifically from the illiquidity of a stock. Any stock like this IMO needs to be watched closely through the day. Any thoughts on this Richard?
I know I am intellectualizing some here, Richard. But this discussion of ours can help me get a better handle on low priced stock issues. I have looked at many of the stocks that oen particular scan of yours came up with back a few months ago. They looked at times to have very volitile and even "spurrious" (not fluid) price action.
Bob Graham |
