What is Pump and Dump
What is Pump and Dump
This article is written by traders for traders. Here you will see what Pump&Dump looks like graphically, learn where to find stocks undergoing the pump phase, gain valuable practical experience in trading pumps, and get a general understanding of what it is and what traders do with it. We tried to explain the pump strategy in simple terms and share trading experiences of such stocks — our own and that of traders from our prop firm.
What is Pump and Dump
Let’s translate "Pump and Dump" from English. Pump means inflating (pump, to inflate). Dump means a sell-off. This means inflating the stock price followed by its "dumping." This price behavior forms a stable graphical pattern. The pump-and-dump model appears across all timeframes — from days to minutes. However, as a rule, pumps are most favored by intraday traders. It is undoubtedly their priority.
Example of Pump and Dump on a Stock, Stock Market, D1
Ticker BIMI, a company engaged in energy-saving technologies. Growth from $4 to $25 in a few months. That’s over 500%. And an equally rapid fall.
Pump and Dump on BIMI, Daily Chart
Example of Pump and Dump on Cryptocurrency, W1
Here’s our favorite Bitcoin — BTC/USD.
Bitcoin Pump and Dump
Pump Trading Strategies
Pumps can be bought or shorted. Each of these approaches has its advantages and disadvantages. Essentially, they are two sides of the same coin.
- Buying pumps involves numerous trades with results close to zero or slightly negative, followed by one large trade that covers all the small losses.
- Selling pumps is the exact opposite. It involves many profitable trades with relatively small profits and rare but significant loss trades. This strategy features a good Sharpe ratio and an upward-sloping equity curve. Shorting pump strategies is statistically one of the most profitable. Results from three Fondexx Prop Contest trader competitions showed that pump short sellers achieve the highest profitability with moderate risks over short distances.
How Pumps Are Formed
A synonym for a pump is hype, a general frenzy when everyone and their dog feels an urgent need to buy this stock or cryptocurrency (see Bitcoin chart above). This hype can be natural or artificially created.
We’ve talked about buying and selling pumps, but creating pumps is also a strategy. It’s a strategy used by big players or fraudsters.
Such players try to raise stock prices based on recommendations rooted in false, misleading, or heavily exaggerated statements, rumors, or expectations. Executives of this scheme, who have already taken a long position in a company’s stock, close their positions, sell their shares, and secure a profit after the hype leads to a sharp increase in stock quotes. U.S. securities law prohibits this type of trading and imposes heavy fines, but “Pump and Dump” schemes still occur, mostly on over-the-counter stocks — OTCBB.
Previously, this scheme was implemented through cold calls. With the advent of the internet, this strategy became even more popular. "Pump and Dump" schemes target stocks with small and micro-capitalization because they are the easiest to manipulate.
The "Pump and Dump" scheme was the main theme of the films Boiler Room and The Wolf of Wall Street, both of which glorified phone-working brokers who “pumped” stocks.
How to Find Pump and Dump Stocks
The simplest way is to use a screener on finviz.com. For example, in the "Signal" field, select "Top Gainers." This will provide a list like this. Most of the recent pumps will be among these stocks.
How and Where to Learn Pump Trading
For an in-depth study and understanding of the nuances of trading pumps on stock exchanges, you can take a professional course on the "Pump&Dump Strategy." If you’re a beginner, you can build a knowledge base for professional strategies through a basic training course and risk-free demo account trading.