We will ruffle some feathers and talk about pump and dump penny stocks. People love penny stocks because, as the name suggests, they’re cheap, and you can buy many of them. Penny stocks are usually under $1 but can be up to $5. People start calculating how many penny stocks they can buy and get excited. Sometimes, a little too much, without thinking about what they are getting into.
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What Are Pump and Dump Penny Stocks?
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 due to 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.
OTC Pump and Dump Penny Stocks
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 on manipulation.
Investors can find that the ability to make a quick profit is attractive to them. Traders who are starting and do not have much money can see it as a way to grow their accounts quickly without putting up a lot of capital.
Penny stocks aren’t the only thing that pumps and dumps. 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, the hype gets people to invest.
Stock promoters or pumpers will buy a big position in a penny stock and pump and dump penny stocks. You’ll see phrases like “This stock is going to the moon” and “It’s the next big thing.” The vocabulary and arrogance of those who pump and dump stocks are 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 will send this stock through the roof.
The Scheme
No pump and dump stock scheme is the same, but one basic principle never changes. The supply and demand are shifting to benefit the pump and dumper. An investor will buy a large position in a pump-and-dump penny stocks company and need to increase the price.
They can do that through newsletters, chat rooms, websites, and message 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 price spike, bringing in the volume because people will see the move and believe the hype. This shifts the supply and demand in the pumper’s 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 a pump and dump happens.
Chat Rooms
The biggest scam is probably in the chat rooms. You can join many chat rooms, and even the most popular ones out there have been known to pump and dump. What do I mean by this? 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 sell quickly and look like HUGE HERO in their chat room. These stocks usually have a low float with little or no specific volume when trading them, 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, requiring no real skill. Just buy a bull flag pattern, call out your trade, and sell into strength and profit. Beware of learning from these people because they have stacked the deck in their favor, and trading that way and duplicating results will be extremely difficult.
COURSE |  |  |  |
|---|---|---|---|
| DESCRIPTION | Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action | Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading | How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading |
| INCLUDED | Daily watch lists • Trade rooms • Trading scanners • Discord • Live streaming Day Trading > | Daily watch lists • Trade rooms • Options scanners • Discord • Live streaming Options > | Futures target levels • Trade rooms • Real time teaching • Discord • Live streaming Futures > |
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 very popular pump-and-dump sectors. Be very careful of chat rooms that pump low floaters and shady news sites telling you to buy specific cheap penny stocks.
Research
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, pumping, and dumping penny stocks or any stock. If someone you don’t know keeps telling you how great this cheap stock is, you must 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 the news, and 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?
- The easiest way to avoid pump and dump penny stocks is not to 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. Profits can be made if 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. 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.
Some people have made millions trading pump-and-dump penny stocks. It can be done. Just make sure you’re not left holding the bag.
A bag holder got in on the hype and is left holding losing shares.
Trade Carefully
Not all pumps 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 and avoid them!
Notice how the chart ran up on hype and sold off on reality. Investors were overzealous 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 double in value in one day, making a MASSIVE high wave candle (read about those in our candlesticks course). And, of course, it has been selling off ever since. When will it pump again? It’s hard to say it’s 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 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. Please stay safe and take our courses to help you on your journey of trading smart and building your brokerage account.
