Pump and dump schemes exist in the stock market since… ever.
With the appearance of cryptocurrencies, these schemes also migrated to these new markets.
If you get into a scheme like this without knowing you may get financially hurt pretty bad.
Let’s learn how to spot them so that you can stay away.
And if you are into aggressive types of risky market plays…
I’ll teach you a way to trade them too.
What is a Pump and Dump scheme?
A Pump and Dump is an illegal way of attracting investors to buy a particular stock or cryptocurrency.
Typically, these stocks (usually penny stocks) or cryptocurrencies that are chosen by the pumpers, have low liquidity.
This makes them easy to manipulate.
Because there are so few people trading them, and a so small number of pending orders, a few thousand dollars hitting the ask can make the price go up by a lot.
The scammers pumping the stock usually try to attract the biggest amount of people to buy the stock at the same time.
And what are they doing as this happens?
You know, they were not waiting for you to buy the stock…
They already owned it before they start to pump it.
As the price goes up, they are simply dumping their stocks on you and getting exponential gains.
At some point, traders that entered at the beginning of the pump start to take profits too.
Creating a lot of selling pressure.
As you are probably thinking, things can turn from bullish to bearish really quickly.
As the price starts to come down, the other traders start to close their trades too.
Unfortunately, most of them are at a loss…
As they close their trades, they create even more selling pressure, making the price collapse.
Lucky the ones who were able to sell at profit before the crash.
Here’s what a pump and dump scheme looks like in your charts:
How to spot a Pump and Dump scam
Pump-and-dump scammers are getting more creative with time.
But the same red flags appear over and over.
Let’s take a look at them.
Red flag #1 – You’re getting unsolicited emails or phone calls to buy a certain stock
Does it promise guaranteed results?
There are no guaranteed results in trading…
Anyone promising you results is a scammer, period.
Does it mention exponential returns to good to be true?
Then it’s probably too good to be true like everything in life.
There’s an urgency to buy the stock before it goes to the moon?
Then it will probably just crash like a SpaceX rocket that didn’t make it.
Basically, you should follow your common sense.
Run away from hypes and only invest or trade what you understand AND believe.
Red flag #2 – You’re following stock advice from large social media accounts
Social media, like Twitter or even Instagram, is frequently used to pump stocks or cryptos.
These accounts frequently have hundreds of thousands of followers.
The owners of these accounts often show signs of extreme wealth, like expensive watches, cars, travels, and even private jets or yachts.
These are just to make you believe that they really know what they are doing and that if you follow their recommendations you can achieve similar results.
Instead, they already own a lot of the stock before they recommend it to you.
These stocks usually have low liquidity and are barely traded.
When they shout about the stock on their social media, all their thousands of followers will buy the stock at the same time.
Creating a big pump that makes the price go up quickly.
At the same time, the scammers are dumping on you the stocks that they purchased earlier.
It’s just a matter of time until the stock crashes like a rock.
Red flag #3 – The companies you’re investing in are not transparent
Making your own due diligence before making any investment is mandatory.
You should be able to easily find financial statements of the companies and businesses they are into.
Search about the company’s CEOs and their past.
They often move between different companies after making their pump game.
Websites like investorshub have boards where people share their due diligence.
But be careful, pumpers are often found there too…
Red flag #4 – The wrong number scam
Imagine that you get a message on your voicemail.
And that message was from someone that you don’t know, and apparently was not for you either.
Then you hear the message and it’s about a hot stock, that’s about to blast.
Would you consider buying that stock?
I hope not…
A lot of people do it…
Without knowing that they are actually falling on the wrong number scam.
And as more and more people keep joining, the price of that stock keeps increasing.
While on the other side…
The pumpers are dumping their pre-purchased stocks on you.
Pump and Dump Discord and Telegram groups
This is an increasing trend over time.
Pump-and-dump groups on Discord or Telegram keep appearing like mushrooms.
They tend to target small-cap coins, with a lack of volatility.
And the bigger the number of subscribers, the more powerful can be the pump.
Look at this group, over 800k subscribers:
At a predetermined time, they share the coin with everyone.
This one even has a projected gain of 400-700%.
And here’s the typical result of a chart after a pump.
This one is not bad, it kept going up for 5 minutes before it crashed.
Sometimes they go up for as low as only a few seconds before they collapse to the original price.
Should you use Pump and Dump groups to trade?
I wouldn’t recommend participating in pump-and-dump schemes.
The probability of getting losses is much bigger than getting profits.
You may get a couple of trades with some nice profits.
But in the long term…
You’ll probably lose more than win.
If you want to be a trader you should aim to be independent.
That includes learning how to trade and take your own trades without needing to rely on anyone else.
Do you still want to trade them?
Then keep reading.
How to trade a Pump and Dump?
Trading these pumps and dumps may be a lot of fun (when things go right).
I still reiterate though that I strongly advise against participating in these schemes.
First, they are illegal, and people running them may get into trouble with the law.
Secondly, the chances of getting losses are way bigger than getting profits.
Having that said, let’s go into details.
What time frame should I use to trade pumps and dumps?
If you are following Discord or Telegram groups that post their stock or crypto at a defined time, you shouldn’t trade them above the 1-minute time frame.
M1 is the best time frame to trade them.
Things will just go crazy very fast, you want to get in and out very quickly.
The pump and dump will happen in a matter of minutes, if not seconds.
If you are trading stocks manipulated with potential fake news and misleading information, a daily chart can be a good option, and frequently a weekly chart does well too.
What’s the best time to enter the pump?
Discord and Telegram groups, just go immediately as the stock or cryptocurrency is released.
For other kinds of pumps, wait for a strong daily or weekly candle, popping away from the previous sideways range.
This candle should have a big volume too when compared to the most recent previous candles.
Suggesting a lot of money entering the market at that time.
That’s your signal that things are starting to move.
Here’s an example of the pump starting, breaking the previous range:
When should I take profits?
Since the failure rate tends to be big, you will probably do better if you aim for big profits.
A 10x return possibility is frequent, although sometimes you can get up to 20x, 50x, or even 100x.
Taking profits gradually as the price goes up after a 10x return may be a good option.
Here’s our example, in this case, the pump made the price increase 65x.
Pumps and dumps are extremely dangerous.
You need to be extremely skilled (and have some luck) to be able to win this game.
Although the charts may look good a lot of times, notice that the price may have huge volatility during the pump and the dump.
That may make your orders open and close at completely different places than what you were expecting.
If you want to try trading pumps and dumps, go slow, and trade with a very small amount of capital that you can afford to lose.
This is what you learned today
- Pump and dump schemes are an illegal way of attracting traders to buy a stock or cryptocurrency, inflating the price, while the pump creators are dumping their pre-purchased stocks on the traders that are coming in.
- Some red flags of pump-and-dump schemes are: unsolicited emails or calls to buy an asset, stock advice from social media accounts, and shady companies suddenly bombarded with very good news.
- Pump and dump Discord and Telegram groups tend to have the fastest pumps and dumps, that last for only a few minutes, if not seconds.
- It’s possible to trade pumps and dumps, but they are extremely difficult and the risk of losing is way bigger than the risk of winning.
Now, I want to hear from you.
Have you ever traded a pump and dump? What were the results?
Let me know below in the comments.