On June 17, 2014, shares of an unknown CYNK company were worth $ 0.10. USA. The company for three years did not receive revenue and had an accumulated net loss of about 1.6 million dollars. USA. Only one day the company needed in order to increase the value of their shares to 14.71 dollars. USA. After another day the shares went up to 21-22 dollars. The US, and CYNK’s capitalization reached 6 billion, which actually allowed it to enter the S & P 500 for this indicator. In just a week, the share price rose 360 times. For comparison, over 10 years, Google shares have risen in price only by 976%. Later the SEC regulator intervened in the situation, which stopped trading in securities. Someone managed to exit the market by selling papers at a huge price, and those who were out of money became acquainted with the strategy of Pump and Dump.
Pump and Dump: how to make money on garbage promotions
The strategy of Pump and Dump is earnings on the psychology of traders chasing easy earnings. It looks like this:
- A large investor finds a security worth up to $ 10. USA and invests money in it. It is important that the company does not have any positive reports and news, otherwise artificial growth will be supported by real fundamental factors;
- paper begins to grow gradually (Pump), after which a fundamental rationale for growth is presented to the media and trading circles (it is not difficult to think of it — it is important to convince ordinary traders that growth has potential);
- speculative capital is beginning to enter the market, counting on making money on growth;
- at some point, the trader fixes the position (that is, sells his shares to those who are still hoping for growth), knocking down a growing trend. The trend begins to fall (Dump is a massive sale of shares).
This tactic, which resets the deposits of ordinary traders, has a wave interpretation: Pump and Dump passes in several waves. On the first wave, a large investor only partially fixes the position in order to allow a slight pullback. If the rollback is too large, traders will lose interest in the asset. A small pullback will be perceived as a correction, at the bottom of which, on the contrary, you need to buy a temporarily cheaper potentially promising asset. There comes the second wave of the Pump. The number of waves can be any until a large investor leaves the market.
Understanding the principles of this strategy is important for conservative traders who can take the artificial surge for real growth and invest at the peak.
The Pump and Dump strategy can often be found not only on junk shares or unpopular assets, but also on currency pairs, oil or gold in the day. “Bulls” and “Bears” with large capital are trying to disrupt each other’s feet, swaying the market artificially and in waves. Only on these assets, the waves are several times smaller than on the stock market.
How to make money on Pump and Dump for simple traders:
- Watch for any sharp asset growth (for example, for imperceptible stocks, we’re talking about at least 50% per day). Enter the market only at the beginning of growth, after analyzing whether there are fundamental factors;
- open a short position at the time of reversal. Do not enter the market on the second wave of the Pump;
- On each wave of a pullback, open a short position. It’s better not to open a long position on the second and subsequent waves, as there is a risk of a sudden reversal and failure of the stops due to slipping.
Conclusion. Pump and Dump is a signal to conservative traders that no one can enter the market. For active traders, this is an opportunity to make money with professionals by repeating their actions. It is important to be able to leave the market in time, feeling its saturation. The strategy carries great risks. But, the higher the risk, the higher the profit, the more you just need to follow the actions of larger investors.