For those of you who may not know, a pump and dump are essentially when a group or when multiple groups of traders, whether that be through some kind of stock promotion, alert service, or even some kind of trading chat room with, you know, 1000s and 1000s of traders in it. If they all start to come together and pretty much simultaneously buy into the stocks, that’s going to inevitably push the stock price higher because of all that increased demand. And when the stock then starts to run higher, it’s going to pop up on the radar of other traders through their screeners or even on the top percent gainers for the day. And that’s of course, going to bring even more demand from these other traders that are now seeing the stock. And eventually what’s going to happen is the traders that got into this stock first. And the ones that initially started to pump the price of the stock up higher are then going to sell to these people that are buying into the stock far too late. And they’re going to lock in their profits while these people that are chasing up at the highs end up taking a big loss once that demand starts to shift over to supply and the price gets dumped back down to lower levels. So anyway, the reason that this is most commonly found in the penny stock market is that penny stocks are much more easily manipulated, mostly due to the lack of volume.
Now naturally, when a stock is spiking out whether it’s a pump and dump, or even if it’s a valid move in the market, it’s going to have a larger amount of volume than it typically does on any given day. However, with that being said, if you look at a stock’s history, and you see that for example, maybe the stock only trades about 10 or 20,000 shares on any given day, but then pretty much out of nowhere, the stock starts to spike up. And it’s trading 10s of millions of shares on one specific day. That is often a sign of a pump and dump because like I said, these pumping dumps typically happen in penny stocks that trade very thin volume on any regular day because those are the ones that are going to be most easily manipulated. And it’s going to be easier for these pumpers to push the price of that stock up in the first place.
Social media interaction:
So believe it or not, social media interaction can actually be a big factor in whether or not a stock is being pumped. And the reason for that is because a lot of new and inexperienced traders see that these big well-known traders are constantly mentioning a single stock, and because of that, they take it as a recommendation to buy the stock. And simply put that’s kind of how these stock pumps can actually start just from social media interaction. So one way to actually check in on the social interaction of a stock is to actually go over to stock twits. Now personally, I don’t use stock twits, and I highly recommend against taking any trading or investing advice from stock twits because it does seem to be generally filled with pretty inexperienced traders. However, with that being said, you can use it to get an idea of how social media interaction is currently for any given stock. So if we take our example again and search in web UI, on the page for this specific stock, what you can do is actually click on the message volume, and it’s going to give you a chart of the volume of how many mentions of this stock were posted here on stock twits over the past month or so. And you can see that up until the time that it was pumped, there were pretty much zero messages posted on this board for the stock symbol we. Then once that pump and dump started, you can see that very quickly the message is shot up from about to zero per day, all the way up to thousands of messages in a single day. And because the market is moving on supply and demand, a higher amount of demand is going to push the stock price higher. And vice versa, a higher amount of supply is going to push the price of the stock lower. More often than not, when you see such a huge spike in demand and a huge spike of interest in this given stock, inevitably, there’s going to be a breaking point and it’s going to switch over to the opposite side. So that means that that demand is eventually going to switch to supply. And that’s when the dump in the stock is going to start taking place.
Company news and press release:
Okay, so those two things alone can be very helpful and hopefully helping you spot a pump and dump in the market. However, the third and the last one is actually going to be probably the most important when it comes to looking for a pump and dump. And that’s going to be some kind of news or press release, whether it be something like an earnings report, you know, if the company is running trials for some kind of treatment or drug candidate, that can be a great piece of news or catalyst. Maybe they got some kind of patent or they’re having some kind of collaboration with a bigger company. All of those things are valid pieces of news that can drive the price of the stock higher. So, if we go over to Yahoo Finance, you can very quickly see if there’s any kind of news or press release being put out by the company that actually validates the move in the market.
If, the most recent piece of news happened three days ago, which in this case was just after that pump actually took place. And before that, there was nothing for over a month. So, obviously, there was no piece of news or press release that actually led to the price of the stock being pushed up. You can safely assume that it was pretty much pushed up by the random spike in volume that took place once the pumpers actually started to push the price of the stock higher. And actually what happened, in this case, is this press release that happened three days ago, after the stock had already spiked up, is the company put out a press release basically saying that they have no idea why the stock is spiking up in the first place. And the reason that they decided to do that is that if the stock had continued to spike up the way that it was, eventually it’s going to draw a lot of attention to the stock. And it’s going to draw a lot of attention to that company. And the SEC is going to start questioning the company to try to figure out why the stock is having such a significant price increase. And to avoid the SEC from doing that the company put out this press release, basically saying they have no idea what’s going on. And they don’t know why their stock prices skyrocketing. So that way the company can avoid questioning by the SEC.
But essentially, by doing so they’re pretty much confirming that this is just a pump and dump. And from there the stock price will dump straight back down and is now currently after being up at that high. Obviously, anybody that was late to this party and bought into this, they were dealing with large losses once the stock did start to dump back down.
Can you make money from Pump and Dumps penny stocks?
And that’s really why I wanted to make this article to hopefully help you get an idea of how you can spot these pumps and dumps in the market. And you can be more prepared to trade them in the first place, you don’t have to necessarily completely avoid pumping dumps because they can be a great way to make money in the market. As long as you’re early to that momentum and you’re trading with proper strategies and proper risk management, there’s no reason that you can’t take advantage of that momentum while it’s still there. With that being said, you do want to make sure that you are very cautious because when that momentum switches to the downside and the dumping starts to happen, it can be a very quick sell-off to the downside.
Once the momentum does shift to the downside, one of the ways that you can actually take advantage of these pumping dumps and profit from them coming down is by short selling them once that momentum does shift to the downside. Now, as always short selling does come with some additional risks. And it’s definitely not recommended for new traders.
Disclaimer: All of my articles are published on my website and mt5 forum only.
Last edited by Youcefstyles; 22-07-2021 at 04:37 AM.
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