An Introduction to Pumps & Dumps

If you have never heard of pumps and dumps before, then you have come to the right place, because this is exactly what we are here to talk about today. Have you ever got caught up in the hype of a new cryptocurrency, so you bought a ton of it, only to have it crash shortly after? This can also happen with stocks, when there is a ton of hype surrounding a certain one, it gets bought a whole lot, rises in value, gets bought more, and the all of a sudden, it crashes and loses all of its value.

Well, this is known as a pump and dump, and it is generally something that happens on purposes. Pumps and dumps are often planned events that can make a whole lot of money for traders. The problem is of course if you don’t get out of the trade long enough. If you hold onto an asset too long, once it starts to get dumped, you will lose all of your money. Today, we’re going to introduce you to pumps and dumps, to help you make money by trading them.

What Exactly is a Pump and Dump?

In case you don’t know what a pump and dump is, this is a market phenomena that involves the value of a market asset quickly skyrocketing in value. This happens due to an asset getting lots of attention and getting hyped up. With stocks, this is often false information and rumors spread by people who want to artificially inflate the price of an asset.

This is known as the pump, when the asset rises greatly in value, usually due to an artificial inflation caused by a massive amount of buyers. However, those buyers, when the asset reaches a certain value, will then all quickly sell that asset to make a huge profit.

Due to the laws of supply and demand, this then causes the value of said asset to drastically plummet, often being totally wiped out. This is the dump, the huge sell-off that happens. Hence, the name, pump and dump.

Now, pumps and dumps are generally illegal, especially when it comes to inflating stock prices with rumors and false information. However, the fact of the matter is that pumps and dumps happen all of the time, in all sorts of market.

Whether it is publicized or not, pumps and dumps happen, and whether or not they are illegal, you can still take advantage of them. The trick is to not get overwhelmed by the hype, and exiting the trade at the right time before the sell-off or the dump occurs.

How to Trade Pumps & Dumps

To trade pumps and dumps, you need to first be able to identify them. Remember that these pumps and dumps can happen in all markets and in all timeframes. When you want to identify pumps and dumps, make sure to use timeframes that aren’t going to get in the way of your daily life. You need to use timeframes that are going to allow for consistency over the long run.

When it comes to identifying current pump and dump schemes, one of the best methods is the third slope method. What you need to do here is to use a trendline on a plotting tool. Create a trend line between all of the low points of an asset, and what you are looking for are three slopes, each of which increases in value. When you see the third slope occur from the lowest values of an asset, it is an indication that the pump has started. A strong third slope indicates that the pump is in process.

In order to identify pumps and dumps, you can also use moving averages. You want to use an 8 period and a 20 period moving average. If you see that the price is above both of these moving averages, and your moving averages are very tight, you can then spot fast moving price increases. Just be on the lookout here as choppy markets can cause false signals.

 big tip here is that you should refrain from buying on pullbacks, especially on volatile markets, because those assets can crash at a moment’s notice. If this is the vase, you want to wait for additional confirmation by waiting for a breakout to happen, and for a candle to close. You can then place your trade on the open of the next candle. Now that you know how to spot and enter a pump and dump trade, you need to know how to exit it, or in other words, how to make money from it.

Profiting from Pumps & Dumps

If you plan on exiting a pump and dump scheme at the right time, and you actually want to make money from it, then what you need to do is to use a trailing stop loss. For one, never rely on the opinions of others to get out of a pump and dump scheme.

It’s likely that the people giving you advice are the same ones artificially inflating the price. Therefore, those people will tell you to hold onto the trade for too long, so they can make a ton of money, but the asset will then crash on you.

Never use a fixed profit target with pump and dump trades, because you want to ride the wave as long as possible, but not so long that you suffer the crash. Stay with a trade until it reaches its maximum, and then look for a sign of a pullback. As soon as a pullback occurs, your trailing stop loss should activate and you can get out of the trade with a handsome profit.

The Bottom Line on Pumps & Dumps

The fact of the matter is that pumps and dumps can be quite profitable if properly traded. The trick here is of course to get out of the trade in time. If you want to learn much more about the best ways to trade pumps and dumps, we recommend joining the Income Mentor Box Day Trading Academy.

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