1. What is Pump and Dump
Pump and dump trading strategy consists in the search of shares or other exchange instruments whose prices have been broken up by news, rumors, highly exaggerated or false statements and other manipulations. Often high prices, for example, shares, are the result of PR companies, they are not proved and do not have a foundation in the form of financial companies’ results.
We can look for a point to open long positions in the initial stages of the pump, monitoring the news background of the company, or to open short positions, when a strong upward movement stops. Tracking the news background around the company, you can buy shares when the pumping is just beginning, or shorten shares after a strong pumping, when the growth is 50, 100% or more, and it becomes obvious that the growth is groundless. In this case, we expect to take 30-50% of this growth on the fall.
Often the strategy of trading, pump and dump means opening of short positions, when an imbalance arises in a strongly increased stock after sharp vertical movements. The pumping organizers sell the shares to the crowd on growth, and when the interest of the crowd to buy at high prices disappears, prices start to fall off and return to the point from which growth began and even fall below.
Lately, among large-scale pumps and dumps, I can name pumping of crypto-currencies. At the end of 2017, everyone was talking about bitcoin, anyone who will take the trouble. It was possible to observe a powerful PR company before trading in futures for this instrument. In a variety of publications, it was claimed that bitcoin would cost 100,000, one million dollars. At the same time, crypto-currencies did not have any specific legal status in many countries. It is also not clear how to conduct a fundamental analysis of the crypto currency.
Often, under the guise of a fundamental analysis, one can see a ridiculous analysis of rumors on Twitter, when owners of a certain crypto currency feed the public with “news of the future”. In general, there are many signs of pumps and dumps in crypto-currencies, and the behavior of the price of the same bitcoin, crypto tokens confirms this. In the article, we will consider pumps and dumps in US stocks.