Pump and Dumps and How to Beat Them
Pump and dumps, when you hear about how 95% of traders lose their money this is one of the main causes. A pump and dump is when a company or third party pays someone else to pump or advertise their stock. They are either compensated with cash, shares of the stock, or both. Once the stock goes up the third party or promoter if they have shares sell into the volume causing the stock to then go down. Once the stock starts going down, people who just bought it begin to panic and they start selling causing the stock price to plummet.
There are ways to make money on these promotional picks though. The biggest mistake the average trader makes is buying into the hype of the stock whether its a “research company” giving it a price target of many times higher than its current price or a big press release touting the company. Always look at any PR from a penny stock with skepticism. When investing in penny stocks always have a general idea of what kinds of gains and losses you are willing to take. Also never risk the majority of your account on a single trade. If you’re only willing to lose 10% on the stock, then get out when it hits that and don’t pray for a magical bounce back. It may or may not happen, but at least when you take minimal losses you can keep trading. The best way to trade pump and dumps is to first find a newsletter that can actually move the stocks. Then keep an eye on it for a couple of trades to see how their stock picks trade. If you do decide to trade these kinds of stocks, start off small with maybe a few hundred dollars or so and take your profits once you get 10 or 20 percent. Who cares what the company is doing or what kind of news it has, just trade the ticker. Take your profits and be happy. Yeah you might miss a couple of big percentage gainers, but you’re also gonna miss the pumps that go up 30% and then crash down 50% or more by the closing bell.
Another way you can make money on pump and dumps especially those over $1 is by short selling. Short selling is when you bet on the stock going down instead of up. A lot of traders out there are pure short sellers who are always looking for the next pump and dump to make money on the inevitable dump. One of the more popular short traders is Timothy Sykes. You can check out our review of his newsletter here.
Always remember that these types of promotional campaigns are sketchy. People are being paid or compensated with free shares to pump this stock up and these same people will be looking to dump their shares on you. Don’t trade every stock pick that you see either. These types of plays are inherently dangerous and expect to lose your money on them sometimes. There is money to be made on them though and you can as long as you minimize your losses and get out when your making money. Most of all, do what you feel comfortable doing. If you don’t feel comfortable trading these kind of stock plays, don’t do it.