Pump and Dump Examples

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

How Does a Pump and Dump Scam Work?

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.

The stock is usually promoted as a “hot tip” or “the next big thing” with details of an upcoming news announcement that will “send the stock through the roof.” The details of each individual pump and dump scam tend to be different but the scheme always boils down to a basic principle: shifting supply and demand. Pump and dump scams tend to only work on small and micro-cap stocks that are traded over the counter. These companies tend to be highly illiquid and can have sharp price movements when volume increases. The group behind the scam increases the demand and trading volume in the stock and this new inflow of investors leads to a sharp rise in its price. Once the price rise has formulated, the group will sell their position to make a large short-term gain.

Pump And Dump

An Example of a Pump and Dump

During the summer months of the stock below, a pump and dump scheme was initiated by using a “wrong number” scam. A message was left on victims answering machines that talked of a hot stock tip and was constructed so that the victim would think that the message was an accident.

As seen in the above chart, the price rose from around $0.30 to nearly $1.00, a more than 200% increase in a one-week period. This drastic increase was seen along with an equally large increase in volume. The stock had seen an average daily trading volume before the price increase of less than 250,000, but during the scam the stock traded up to nearly one million shares on a number of trading days. The unsuspecting investors would have bought into the stock at around $1.00. As seen above, it fell to around $0.20, an 80% decline in value for those unfortunate investors.

Note to Investors

Always keep this investment caveat in mind: “If it’s too good to be true, it probably is.” If someone you don’t know gives you a stock tip, stop and think about why they would be so willing to give you such information. Do not think you can make a large and quick investment return because it’s unlikely to happen. It’s also vital that you do your own research about any investment. This should help you avoid being duped by such pump and dump scams.

Pump and Dump

What Is Pump-and-Dump?

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 already have an established position in the company’s stock and 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.

Pump And Dump

The Basics of Pump-and-Dump

Pump-and-dump schemes were traditionally done through cold calling. But with the advent of the internet, this illegal practice has become even more prevalent. Fraudsters post messages online enticing investors to buy a stock quickly, with claims to have inside information that a development will lead to an upswing in the share’s price. Once buyers jump in, the perpetrators sell their shares, causing the price to drop dramatically. New investors then lose their money.

These schemes usually target micro- and small-cap stocks, as they are the easiest to manipulate. Due to the small float of these types of stocks, it does not take a lot of new buyers to push a stock higher.

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 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 perpetrator feels the buying pressure is ready to fall off, he can dump his shares for a big profit.

Pump-and-Dump in Pop Culture

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.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

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.

Avoiding Pump-and-Dump Schemes

Investors should be wary about notices that a stock is about to take off – especially when they are unsolicited – no matter how tempting it may be. Consider the source and check for red flags. Many notices come from paid promotors or insiders, who should not be trusted. If an email or newsletter only talks about the hype and doesn’t mention any of the risk, it’s probably a scam. Always do your own research in a stock before making an investment.

How does Pump and Dump Strategy Work? Discussing the Examples

In order to make money on the stock market, a trader must either have patience or a trading system. Patience makes the most of the money on the stock market. The only thing a trader must do to receive profit is to buy stocks on several different companies (for risk diversification) without the leverage, with dividend payouts if possible, and hold them until there is a wish to take profit.

Stocks portfolio at Finviz.com

I’ll show a simple example. At Finviz.com, you can create your own demo stocks portfolio with the information on the time of purchase and the current profit. In 2020, which was almost seven years ago, I wanted to know what kind of money I could make by buying stocks and holding them for a long time. so, I created my demo portfolio and forgot about it.

At that time, I was choosing stocks on some kind of principles I had. Finally, I bought one share of Delta Airlines (NYSE: DAL) at 56.79 USD and и 4 cheap shares that cost less than 20 USD each. By now, the portfolio profit has exceeded 48,000 USD. However, at some moments the portfolio value was more than 100,000 not including dividends.

Thereby, taking into account purchasing prices in 2020, 43,258 USD were invested in these shares, which makes the average annual yield 16% and that’s much more than the yield of any bank deposit calculated in USD.

Pump and Dump strategy

When it comes to a trading strategy, it’s much more complicated. There are a lot of different trading systems: some of them make a profit on trend markets, while others – during “dead season”. Some people trade at level breakouts, while others do the opposite. However, in all these systems, periods of profit are followed by periods of losses. As a result, each of these systems requires some particular market conditions, when they will ear profit.

But today we’ll talk about one of the systems, which doesn’t depend on the market environment, the country’s economy, crisis, or something like that. This trading system has always been and will always be efficient as long as trading operations on the stock market are performed by a man.

This trading system is based on nothing but human greed and wish to make a fast buck. And you know, the greed will always follow the money.

The trading system’s name is Pump and Dump.

Example with NanoViricides Inc

So, pay attention to NanoViricides Inc (NYSE: NNVC) stocks. Until the middle of 2020, the average traded volume didn’t exceed 50.000 shares per trading session, while the trading range was between 1 and 3 USD per stock. However, in only a month, the daily traded volume skyrocketed up to 4.4M shares per trading session and in 4 days it was more than 33M shares. And this was happening to the company, the capitalization of which was less than 32M USD with only 17 people on the staff.

For a better understanding of the volume growth rate, let’s compare it with a famous car manufacturer, Ford (NYSE: F), shares of which are also not very expensive. The average traded volume in Ford is 35M shares, but its capitalization is 35B USD and the staff includes 199,000 employees. Sizes of these companies are way too different, but the traded volume of shares is almost the same.

Okay, going forward. Over the last 4 years, NanoViricides Inc never became clearly profitable, that’s why such a fast growth was insupportable, in other words, it was just “pumped” with money. Consequently, this growth had to be followed by a similar quick decline, and we can see it right now.

However, any growth of stocks has to be supported by something, so in order to understand whether you should sell shares on this company or not, it’s necessary to find out the reason for this growth. For that, you can use any available sources of information.

Analysis of the NanoViricides Inc news

First of all, it’s necessary to check the Finviz.com website, which contains almost all news related to the targeted companies.

Reading the news headlines, one can find out that the growth was caused by the Chinese coronavirus outbreak, while NanoViricides is one of the companies that develop a vaccine to confront the virus. As a result, investors, capitalizing on a situation, started to buy up shares of pharmaceutical companies, thus increasing demand for them. And then it is transforming into an avalanche.

Watching the stock price movements

On the first day of the increased demand, shares rose not more than by 300%. Of course, on the following day, investors that keep track of stocks with high volatility also paid attention to this company. They found out the reasons for growth in the same way we did and started monitoring the situation.

And then the market gives traders a real present. On the following trading day, the stock’s opening price is the same where it started to grow. As a result, a greater number of traders, much more than earlier, joined this purchasing process. And guess what? This leads to an increase in demand by 8 times: the stock price rose by more than 400% in just days.

And here comes the moment when investors, who bought the stock at the bottom, start selling it and take profit. In this situation, the one who sells first will get more profit. But that’s not the end.

At this moment, the fast growth of the stock attracts traders, who want to make money on its decline. Hence, the stock attracts everyone who is looking for an opportunity to make a fast buck.

Bears come into play

Now it’s a real fight for profit between bears and bulls. Bulls are doing their best to keep the stock at the top because many of them didn’t have a chance to buy it at the lower price and then hope that the stock will continue rising. They place limit buy orders, thus creating demand for the stock, while bears increase their short positions, thus satisfying bulls’ demand.

As a result, investors, who bought the stock at the top, get trapped as they start accumulating losses. The stock is plummeting and decisions have to be made immediately because every wasted minute can be worth thousands of dollars.

Finally, bulls have to sell the stock and record losses, thus putting additional pressure on it and making its price plummeting even faster. In the end, the stock price usually reaches the level, from which it earlier started skyrocketing.

After all battles are over, comes the calm period. The company is analyzed by an entirely different group of investors, who specialize in long-term investments. If they find the company promising, they start opening positions, but slowly, without attracting a lot of attention. As a result, the stock is forming a new uptrend, which may within several months break the highs reached during the feverish demand in the past. Such intense fights between bulls and bears happen from time to time in stocks of cheap and unknown companies.

So, I described how traders act at different stages of an increase and decrease in stock prices. In this particular example, bears were stronger and bulls won’t forget it. Such battles occur almost every day. An excellent example of the battle where bulls won is Tesla (NASDAQ: TSLA), when bears lost more than 5 billion USD.

To find out how to become a bull and manage to buy a cheap stock before it rises, read FDA: How to Find Stocks of Promising Healthcare Companies?

And now let’s discuss how to make money on the depreciation of stocks, the growth of which hasn’t been confirmed by improving financial indicators.

How to make money on the depreciation of stocks?

Let’s remember what bulls do for ceiling the stock price. They place limit buy orders. These orders are displayed in on the left in Level 2 (Market depth) window.

As a result, as long as the big order at some particular price is in Level 2, the stock price won’t go below this level. If there is no major seller in the stock, who is ready to satisfy the demand with a single deal only, then we can start noticing on the chart that the stock is forming a support at the level where the buy order is located. It means that the price is reaching this level and rebounding from it, because minor sellers can’t satisfy the demand and because active buyers appear close to this level in order to prevent the price from further decline.

This continues until either buyers or sellers run out of money to increase their positions.

We shouldn’t join this battle from the very beginning, it might be enough just to watch the happenings and catch the moment when bulls start faltering. And this moment is defined by a breakout of the support level, after which buyers sometimes try to keep the price, but in most cases, they lose control over the situation and bears take charge. This is exactly the moment when we should enter the market, thus putting additional pressure on the stock.

Example with Inovio Pharmaceuticals

Now I will show how it looks on the chart. As an example, let’s take Inovio Pharmaceuticals (NASDAQ: INO). It’s a loss-making company, shares of which rose at the time of the coronavirus outbreak.

Since December 2020, the stock has risen by more than 100%. The stock required special attention at the moments when each new trading session started with a gap upwards.

The wider the gap, the higher the chance that the stock may reverse soon.

In this stock, the gap was widening for three consecutive trading sessions. Our task is to define the exact moment when bulls and bears start their fight. To do this, we switch to M5 and wait for the first support to appear.

Finally, at the end of the third day of skyrocketing, bulls formed a support level at 5.30. On the following day, the stock’s opening price was above this level, but bears managed to break this support in ten minutes, make bulls surrender, and start a new decline in the stock.

Regarding the chart, bulls were keeping their hopes up to recover the price. They managed to stop the decline at 4.74 and were “defending” the support level for more than 3 hours, but in vain. Bears broke this support level as well and then, feeling their strength, formed a resistance level at 4.50 per stock and prevented the price from breaking it. As a result, bulls lost all hopes to recover the price and the stock went below 4 USD.

Thereby, by selling 1,000 shares at 5.30 (invested amount would be 5,300 USD), one might have earned 1,300 USD in two days. Such situations in stocks happen almost every week.

MegaPump through the example of Tilray

Many would think that it’s very childish to trade cheap stocks and decide to switch to something more serious, where it may be possible to profit 20-30 thousand USD per day from 1,000 shares.

Here you go: if you want to make some serious money, welcome to MegaPump. The stock, where millions of dollars are pumped in one share, which may later collapse in a second. But unlike cheap stocks, you won’t see a perfect picture on the chart there. Levels will be blurred, while investors will be acting in the same way they do with cheap stocks. The difference is the trade value.

I’ll provide an example of one such company, the stocks of which rose by almost 15 times in several months.

In 2020, the US government legalized using marihuana for medical purposes. As a result, the companies that were producing medications based on marihuana rushed to US stock exchanges.

One of these companies was from Canada, Tilray (NASDAQ: TLRY). On July 19th, 2020, Tilray held an IPO at NASDAQ. Nothing special was happening on that day, the stock was trading the same way as stocks of many other companies.

However, in the media, there was a lively discussion about legalizing marihuana, which later increased investors’ interest in such companies. Ща course, they started looking for opportunities to benefit from this and Tilray step into the spotlight. Literally a month after the IPO, the stock started rising step by step and this growth boosted with each passing day. Then, everything went according to a familiar scenario. Three days before the collapse, the gap between trading sessions increased.

The same happened with Inovio Pharmaceuticals and you can see in in the chart above. All we had to do afterwards is to check M5 and find a spot where bulls are trying to keep the stock from inevitable decline.

There was very high volatility on the day when the price reached 300 USD: the stock could cover 150 USD in an hour, which means that an open position of 1,000 shares could bring 150,000 USD of profit. It’s very difficult to work under such conditions. The profit amount can change every second by thousands of dollars. It’s very essential to be cold-blooded when monitoring what is happening in the chart, see the hints that appear, and look for necessary information.

On September 19th, when the price reached the highest level, bears already tried to stop it at 240 USD, but bulls were too aggressive at that time. As a result, the stock skyrocketed up to 300 USD and investors started to take profit, thus forcing the stock to plummet down to 150 USD.

On the following day, when everyone calmed down, bears once again formed a barrier at 240 USD, but this time bulls couldn’t handle it. In two hours, the stock went from 240 USD to 160 USD per share. As a result, those with deposits exceeding 240,000 USD could easily get profit of 80,000 USD from a position of 1,000 shares without any fuss.

And now let’s collect all the information that is necessary for trading with Pump and Dump system.

Choosing stocks for Pump and Dump strategy

To do this, one can use Screener at Finviz.com.

In search settings, go to Signal and choose Top Gainers, then go to Current Volume and choose Over 100K.

Then turn your attention to the stocks, prices of which increased by more than 50%.

The higher the percentage, the deeper the decline.

After choosing the stock, go to the R Trader platform and start monitoring its M5 chart. The purpose of this is to find the moment when bulls or bears start forming the level, where you can later open a position. In our case, there two scenarios to open a position. The first one implies a breakout of the support level formed by bulls.

The second scenario suggests a rebound from the resistance level formed by bears.

After that, all you have to do is click Sell.

Conclusion

Pump and Dump trading system is very simple in use and can be easily handled by any trader who knows how to work with support and resistance level. Potential profit is not limited, because traders can work with stocks of both cheap and expensive companies. An initial deposit od 1,000 USD is enough to start working with this system.

All a trader is required to do is to stay away from the battle until bears take charge.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Like this post? Please share to your friends:
Binary Options Trading Wiki
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: