Trading signals are often associated with trading software and automation. But it doesn’t need to be a trading robot that is creating signals. A human being may also be sufficient. Perhaps he even outrivals his metal can cousin by a wide margin. It depends, namely on the trading environment.
In the world of the large stocks or ETFs technical analysis works well. With smaller stocks it gets more difficult. Trading appears to occur more sporadically. In such a situation the basic logic of TA is undermined. Prices tend to shrink without continuous interest, of course with making squeaking random noise.
Typical penny stocks are more something that has to get sold like bread and butter. This is the home turf of stock pumpers and garbage sellers, both of them being snake oil sales men. Small cap stocks are contrary to pennies often companies that had already seen better days, stock price and earnings wise. Behind them is with a much higher probability a real company with a sound business model that already makes or has made money.
So, what is the replacement for technical analysis in the microcap stock universe?
It is a set of very simple rules:
Stocks that have come down in price severely have potential.
Renewed trader or investor interest as evidenced by an exploding volume and a rising price is statistically a signal for further advancing prices.
Beyond these trading rules you just need a scanning mechanism that weeds out false signals. Mostly that are the ones where it is clear that someone is pumping the stock to make a quick buck. By the way, even that scheme can be exploited. You just would have to be quick or early informed…
At its best you have a microcap signal source that you can trust. Trust is important, prediction perfection or some hidden advantage not. Someone like the above (that’s me) who has the right idea about small stock trading and does a thorough work will come up at times with absolute killer trades for you. And now compare that to your pale mutual fund losses of the last years…