Pump and dump trading strategy

Pump And Dump.

What does 'Pump And Dump' mean.

Pump and dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company's stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.

BREAKING DOWN 'Pump And Dump'

Boiler Room Tactics.

The pump-and-dump scheme formed the central theme of two popular movies, "Boiler Room" and "The Wolf of Wall Street," both of which featured a warehouse full of telemarketing stockbrokers pitching penny stocks. In each case, the brokerage firm was a market maker and held a large volume of stock in companies with highly questionable prospects. The firms' leaders incentivized their brokers with high commissions and bonuses for placing the stock in as many customer accounts as possible. In doing so, the brokers were pumping up the price through huge volume selling. Once the selling volume reached critical mass with no more buyers, the firm dumped its shares for a huge profit. This drove the stock price down, often below the original selling price, resulting in big losses for the customers because they could not sell their shares in time.

Pump and Dump 2.0.

The same scheme can be perpetrated by anyone with access to an online trading account and the ability to convince other investors to buy a stock that is supposedly ready to take off. The schemer can get the action going by buying heavily into a stock that trades on low volume, which usually pumps up the price. The price action induces other investors to buy heavily, pumping the share price even higher. At any point when the schemer feels the buying pressure is ready to fall off, he can dump his shares for a big profit.

Claims about how a stock is set to break out should be met with a considerable amount of caution. Always do your own research in a stock before making an investment.

Pump and Dump.

(Tricks of the Trade)

Also referred to as ramping, this is an old trick often perpetrated by sly old hands who prey on newcomers.

The Ingredients.

One penny stock. Either a former high flier that has fallen from grace or a newer issue that failed to attract investor interest. It is important that the stock has been flat-lining at a few cents for the past 6 to 12 months. No institutional following. This is a key ingredient -- too many cooks may spoil the broth. Our chef does not want outside interference. Low liquidity. Often large tranches of stock in small companies are tied up in the hands of controlling interests, management, family interests or other connections who are not ready sellers. An industry that has the capacity to generate excitement - gold mining is the tried and trusted favorite but there are a number of new variations: dotcom, telecom, biotech, the list is endless. Basically anything that will make a good storyline. A large supply of mug punters, invited to the feast without realizing that they are the main course. A complete lack of conscience.

Preparation.

Our chef will scan penny stocks until he finds a prospective target with a suitable storyline. A quick study of existing shareholders will reveal the float of stock that is available for purchase. He slowly accumulates a sizeable portion of the free float, careful not to give the game away. Bidding the price up too quickly would alert other traders before he is ready. When he has built up a sufficient line, our chef is ready to add the main ingredient.

Having cornered a sizeable chunk of the free float our chef befriends a few punters and lets them in on his find. He posts messages across all the popular investment forums, with headings like "The next . " mentioning some recent stock that has taken off into the stratosphere. He will burley the water with "inside information" about new contracts in China or a gold strike in Indonesia. He will post several times a day, on the same thread. There will be much reference to "having gone into this in detail" -- thereby saving you the time -- and having an intimate knowledge of the company -- hinting at inside information. With little or no technical analysis, or else some shaky assertions about a double bottom, a broad base or a breakout, price targets are pulled out of thin air. If the stock is trading at 8 cents, we may see a claim that "this could go to a $1.50" or similar extravagance.

The Recipe.

Every time that our punters dive into the stock, the price goes up -- because our chef has cornered the free float and created a shortage. The more price rises, the more excited the punters become. Our hero is now acclaimed as a stock guru and his advice is eagerly sought on other new finds.

The rising price attracts more and more punters, eager to get in on the action, until there is a veritable feeding frenzy. At this stage our chef starts selling into the face of the rally, steadily offloading his line at a profit of several hundred percent. Buying is strong, so initially no one notices. Price no longer spurts ahead as before, but it still edges upwards, albeit on very heavy volume. Some of the volume and money flow indicators start to tick downwards. By this time our chef is cleaning out the remaining few stragglers before heading off for fresher pastures. He goes silent or, if he has a malicious streak, announces that he is "taking profits".

With buying support dissipated there is a rush for the exits. The stock tanks — falling back to the previous trading range and leaving our band of punters cursing their luck.

Compare our market views.

Despite huge trading volumes on this tiny software company, Twiggs Money Flow (21-day) failed to cross into positive territory. Someone was selling a sizeable parcel of stock into the rally.

The equivolume chart tells the full story. Note the broad bars (width signifies volume) and tall shadows (weak closes) in the up-trend.

Gold mining is a perennial favorite. This small gold and nickel exploration company shows similar activity.

The Moral of the Story.

Stay out of small caps until you are wise to the tricks of the trade.

Do your own research and treat everyone else's with a healthy skepticism: If it sounds too good to be true — it usually is .

Avoid Pump-and-Dump Penny Stocks with This Strategy.

By Diane Alter , Contributing Writer , Money Morning • August 4, 2015.

Start the conversation.

Many investors continue to fall victim to pump-and-dump penny stocks – but this strategy will help any investor avoid this common penny stock trap.

Pump-and-dump penny stock scams are typically created by professional marketers working in cahoots with micro-cap companies and/or dishonest brokers. The aim always the same: to make money off unsuspecting investors' honest trades.

Here's how the pump-and-dump penny stock scheme works…

How Pump-and-Dump Penny Stocks Work.

It's common to see messages posted on the Internet urging readers to buy a stock quickly.

Telemarketers often robocall – automatically and repeatedly call investors with a computerized message – to deliver their pitch. These promoters frequently claim to have "inside" information about an impending development, or they claim to use an "infallible" combination of economic and stock market data to select winning stocks poised to soar.

The truth is, these individuals are likely company insiders or paid promoters who want to create heavy buying interest and pump up the share price of a stock they own. Then they'll sell their shares for a hefty profit. Once these cons sell (dump) their shares and stop touting the stock, the price falls. And investors lose money.

Pump-and-dump investors can also short a stock and then create a marketing campaign urging investors to sell the security before it crashes. This way, they are profiting from the stock's fall.

Now there's a new way that pump-and-dump scammers are operating…

The Latest Variation of the "Pump-and-Dump" Scheme.

A number of people are finding they've received a "misdialed" call from a stranger who leaves a "hot" investment tip for a friend. The message is designed to sound as if the speaker didn't realize that he/she was leaving the hot tip on the wrong answering machine.

A message like this is not a wrong number. Instead, it's from someone paid to leave these messages on scores of answering machines.

In addition to these dishonest tactics, be aware that when a new product or service is grabbing headlines, professional con artists will try a pump-and-dump scheme.

But you can avoid a pump-and-dump penny stock scam with this one simple strategy…

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Cryptocurrency Trading: Do Pump & Dump Strategies Work?

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I’ve been trading with cryptocurrencies for almost 4 years now, and I’ll share my experience below.

First let’s check the definition of Pump and dump:

A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once the stock price has risen following the surge in interest as a result of the endorsement.

When it comes to digital currency trading this usually means announcements all over the small cryptocurrency world, tips from “experts” on the trollbox chats, posts about the coin on forums, etc.

I wouldn’t call it a strategy but rather a scam. Besides these announcements and other other ways for promoting a coin, there’s also a direct pumping.

The whale (a trader will a lot of money) starts buying large volumes of one of the coins that have low trading volume. Let say that the trading volume is 100 Bitcoins per day. The whale comes and starts buying the coin, placing a huge buy wall of, for example 50 Bitcoins.

Since there is not enough liquidity (i. e. not enough people that are willing to sell the coin at that price), whale starts to push the price up with the wall. Other traders are soon aware of the “trending” coin, as it has day-to-day price increase of, let’s say, 50%.

This increase in price attracts other investors looking to make a short-term profit and a lot of beginners and people with not enough knowledge about the coin. That way the demand that was fake slowly turns into reality, as more and more people want to buy the coin.

When the price is high enough, the whale starts selling the large amount of coins he bought earlier. This results in a large profit for the whale, and leaves many small investors in the red. These investors are known as “bag holders” as they keep the cryptocurrency in hope that the price will recover.

You can also check this video to learn more about it:

The scam does work and there are many traders who use it, but I would advise against using it. There are better ways to earn a profit on the trading platforms.

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