Alright, we are going to ruffle some feathers and talk about pump and dump penny stocks. People love penny stocks because as the name suggests they’re cheap stocks and you can buy a lot of them. Penny stocks are usually stocks under $1 but can be up to $5. People start doing the math of how many penny stocks they can buy, and begin to get excited. Sometimes a little too much, without really thinking about what they are getting into.
The definition of pump and dump from Investopedia 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.
$GNUS is a penny stock that trapped a lot of unsuspecting longs. They chased prices higher and higher, buying the top, then it came crashing down below the 9EMA daily. Know the warning signs peeps! Look how long it traded lower for? Heikin Ashi candles are shown.
Penny stocks usually trade outside of the major market stock exchanges. As a result, they’re known as OTC (over the counter) or pink slip stocks. Penny stocks can be highly volatile and can be contingent to manipulation.
Investors can find that the ability for a quick profit is attractive to them. Traders who are starting out and don’t have a lot of money can see it as a way to grow their account quickly without having to put up a lot of capital.
Penny stocks aren’t the only thing that pumps and dump. Cryptocurrencies like Bitcoin do too!
When trading penny stocks don’t get caught up in the hype of the story these small companies are telling you. It always seems like they are about to revolutionize their field. Although this may be true it’s the hype that gets people to invest.
In fact, stock promoters or pumpers will buy a big position in a penny stock and proceed to pump and dump penny stocks. You’ll see phrases not only like “this stock is going to the moon” but also “it’s the next big thing”. The lingo and arrogance of those who pump and dump stocks is something you can spot a mile away.
Or an investor claiming they have inside information from someone high up in the company. The information they’ve been told is going to send this stock through the roof.
No pump and dump stock scheme is the same but there’s one basic principle that never changes. The supply and demand and shifting it to benefit the pump and dumper. An investor will buy a large position in a pump and dump penny stocks company and need to drive the price higher.
They can do that through newsletters, chat rooms, websites and messages boards. This drives up the interest in the stock and it’s so exciting you want to get in before the price skyrockets.
There will be a huge spike in price which brings in the volume because people will see the move and believe the hype. This shifts the supply and demand to the pumpers favor. They have the supply in their big position and there’s a demand for it. So they sell for a profit. There usually isn’t a lot of volume on these stocks until there’s a pump and dump happening.
The biggest scam is probably in the chat rooms. There are tons of chat rooms you can join, and even the most popular chat rooms out there have been known to pump and dump. What do I mean by this? Well, they take a huge position on a stock, before letting people know they are long. By the time you buy, they have already gotten a much better entry, on hundreds or thousands of shares.
They tend to sell quickly, and look like HUGE HERO’S to their chat room. These stocks are usually low float with not a lot of volume, or not much specific volume when they are trading it So the traders chasing the guru provide extra volume. Perfect for the guru to sell his shares. ANYONE with a large following can do this, and it requires no real skill. Just buy a bull flag pattern, call out your trade, sell into strength, and profit. Beware learning from these people, because they simply have stacked the deck in their favor, and trading that way and duplicating results is going to be extremely difficult.
Does a Pump and Dump Still Happen?
- Unfortunately pump and dump schemes still happen, especially in the low float penny stock arena. Pot stocks and bitcoin are also a very popular pump and dump sector. Be very careful of chat rooms that pump low floaters as well as shady news sites telling you to buy specific cheap penny stocks.
Have you ever heard the saying “if it’s too good to be true it probably is”? Keep that in mind when you’re trading pump and dump penny stocks or any stock for that matter. If someone you don’t know keeps telling you how great this cheap stock is, you need to get in now because it’s going to the moon, be cautious.
Just like with anything you need to do your due diligence. If someone is so willing to give you this awesome information, consider why. Check out the fundamentals.
Look up the company, find out what the news is, look at the charts. Moreover look to see if there is a history of pump and dumping. Pump and dump penny stocks will show those patterns in the charts.
How Do You Avoid Pump and Dump Penny Stocks?
- Easiest way to avoid pump and dump penny stocks is don’t trade low floaters
- Float under 20 million is notorious for pumping and dumping
- Also, be careful of float under 50 million
- Stocks over $10 have less risk
- Float over 100 million creates less pumping and dumping
- Trade penny stocks over 100 million float for less volatility
- Be aware of stock pumping services
- Be cautious of breaking news sites promoting low floaters
- Read the whole news article not just the headline
- Learn pump and dump patterns such as head and shoulders
Should I Stay Away From Them?
Reading this post about pump and dump penny stocks might scare you away from trading these but you don’t have to be scared. There’s profits to be made as long as you are fully aware of the strategies you can use to trade them.
These are usually stocks you don’t want to hold for long periods of time. Day trading these are probably the best way not to be stuck holding the bag. Take our day trading course if you want to learn more.
There are people who have made millions trading pump and dump penny stocks. It can definitely be done. Just make sure you’re not left holding the bag.
A bag holder is someone who got in on the hype and is left holding losing shares.
Not all pump and dumps are penny stocks. Some are large caps! IPO’s!
Take a look at $TLRY and $BYND for example. Massive long pumps with blow off tops, and then incredibly bearish trends following. Now that you have read our post, you should know how to spot these and avoid them!
Notice how the chart ran up on hype, and sold off on reality. Investors were over zealous on BYND and paid the price if they held too long after the pump was through.
$TLRY had a wild pump on the energy that surrounded pot stocks. Eventually the stock topped by DOUBLING in value in one day making a MASSIVE high wave candle (read about those in our candlesticks course) And of course, has been selling of ever since. When will it pump again? Hard to say, its below its IPO price as of now. Not good!
When you trade pump and dump penny stocks knowing technical analysis, how to read charts and doing your proper research will go a long way. It’s fine to trade them if you know what you are getting into. It’s the people who are still living in ignorance that we are worried about the most. Stay safe and take our courses to help you on your journey of trading smart and building your brokerage account.