Demystifying the Pump & Dump
There are all kinds of pump and dump schemes playing out in the markets daily:
Chat room pumps
I still get stock pumps via the US Mail!
The two (2) I want to focus on today are the intraday Twitter and Chat Room pumps. I focus on these because we see too many traders getting sucked into them lately. These pumps are the ones that can hurt day traders and their accounts the most, leaving newer and inexperienced traders in total disbelief.
I’m not going to get into a discussion on the moral and ethical implications of these pumps. If some individuals want to call themselves professional “traders” and make their living front running their subs, that’s their choice. I'm not here to debate that at all. What I want to discuss today is how YOU can identify these so YOU can decide on how to handle them.
Basically, YOU have choice A or B:
A: Avoid them all together. Just stay away and don’t trade them.
B: Learn to trade them. You must be quick and nimble.
If you’re not a consistently profitable trader, my advice is to just STAY AWAY. Unfortunately, it’s the newer and inexperienced traders that are usually lured into these, not to mention lured in way too late. Either way, you must be able to quickly identify them.
So, how do you spot these? It’s easy once you know what to look for. Here's what I refer to as The Six (6) Stages of the Pump & Dump:
1: Typically a low float and low volume stock.
2: Low volume and/or no volume intraday. *
3: Small volume pops intraday, right before a LARGE volume spike.
4: LARGE volume spike along with a quick price surge between the open and 11:30am.
5: The big drop within 5 minutes when the “trader” announces he sold and everyone else panics and sells out on the market.
6: Little to no volume and a sideways move the rest of the day.
*Most of these will have a recent spike in both volume and price when looking at the daily chart. However, the volume will have often disappeared in recent days and there is no fresh news about the stock. It’s the previous spike that is often used to justify the potential for the stock to move again.
Let’s look a few recent examples and notice how the pattern is the same:
I've included a few more examples at the bottom of the page. Please take a look at those later and see how these always look the same. You see the six stages play out over and over again.
Where does the volume and price surge (#4) suddenly come from? Ideally, it would be coming from company specific news and real buyers wanting to own the stocks. Unfortunately, it usually comes from a “trader” on twitter with 10K+ followers tweeting about the stock. The tweets usually look something like this:
$XYZ coiled to break out.
Watch $XYZ over this flag.
Just bought $XYZ, love this set-up!
Long $XYZ here.
You don’t want to miss this move in $XYZ.
$XYZ could pop over (fill in price) and then squeeze.
I’m ADDING to $XYZ right here.
$XYZ is on HIGH alert. Over (fill in price) this stock can run fast.
Bought more $XYZ for SWING right here.
Note: These were all copied from $TWTR within the last week, I just changed the symbols.
The last tweet is my favorite because it attempts to con you even more by implying the stock is a good longer-term hold. This can cause you to chase because you’ll justify in your mind that it’s OK to get in well above the entry idea because it’s a swing trade after all. Guess what? It’s not a swing trade.
Often these tweets are accompanied by a great looking chart with a visual representation of the idea. This cons newer traders EVEN MORE into somehow thinking the idea is more legit because there’s a chart. It must be a good idea if they took the time to include a chart! You'll look at that chart and see a set-up regardless if it’s there or not. Now, you're just conning yourself.
The other place this volume often comes even more frequently than twitter is when a “trader” in a chatroom with 500+ followers suddenly “calls” the stock: "I’m buying XYZ". Then everyone in the room piles in. FOMO! These typically have even more volume than the twitter pumps since there are more people focused on the stock and hitting buy at the exact same time.
Once you learn to spot these, they seem SO obvious and you start to wonder how and why anyone would fall into one of these traps. I could write a book on why people do this but I’ll simply state this: Day Trading is hard and too many people are looking for the easy $$$.
Understand none of these stocks would have ever moved without these pumps. If you’re looking at the “trader” calling these stocks and saying “Wow, TraderX is a great trader!” or “TraderX always knows which stocks are going to move!”, consider this: If TraderX didn’t have hundreds of other traders buying the same stock AFTER he did, how much would the stock have moved? Or if you bought that same stock with that same set-up but the chatroom wasn’t buying the stock, what sort of move would you have seen? Honest answer: very little if any at all! You should be saying “Wow, TraderX can really move a low float stock”.
We hear things like this frequently:
Why don’t my stocks EVER move like this? Why don’t I ever get that lucky when I buy a stock?
The answer is simple:
Because you don’t have hundreds of people following you into a trade and driving the stock price higher. Stocks move on volume. More buyers than sellers. It's really that simple. You alone can’t possibly create the volume needed. That's why if you learn the wrong habits and think all you must do is learn TraderX’s methods, good luck. If TraderX’s method is pumping stocks, you’ll never be able to do that on your own. You think you're learning a profitable set-up from an awesome trader, but you're not. You’ll trade that exact same set-up in another stock and that stock will go nowhere. Again, it's because the set-up only works when you have hundreds of other traders piling in behind you! Therefore, your small account is never going to grow like the examples you’re being shown. That's the hard truth.
So, what do you do? Give up? Throw in the towel?
Learn to be an actual Day Trader!
Learn real, actionable and proven A+ Set-Ups. Set-ups that don’t require the pump to get them moving. Learn to trade the right stocks that are moving for the right reasons. Start to develop your own process. STOP CHASING. STOP FOLLOWING. There are many set-ups out there that will get you these same sorts of moves. Learn to trade inflection points for example! Those are the types of set-ups you need to learn and trade. Mastering those will help turn you into a consistently profitable trader and grow your account.
Thanks for reading! Questions? Comments? Reach out!
PS: We held a webinar on this topic to discuss it in a bit more detail and showed many more examples. If you would like to check out that webinar (along with all of our previous webinars), just click HERE: WEBINAR RECORDING!
PS2: A few more examples are pictured below. Notice the pattern is always the same. If you want to learn to avoid these, you have to quickly identify stages 1-3 as you see stage 4 starting. If you happen to get sucked in anyway, please get out as fast as you can when you realize stage 5 has begun.