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.
2. Characteristics of Pump and Dump
Among the characteristics of pumps and dumps are:
– a lot of advertising, spam on a certain company from services on the subject of penny stock, which you will have subscription to;
– recommendations of analysts to acquire shares immediately;
– company is led by people who have already been seen in the organization of such pumping schemes;
– the growth of the share price in the absence of news about the company. For example, a sharp increase in the share price by 50% or more in a few days;
– talks about the company’s successes without their confirmation. Various rumors about the financial results, future contracts;
– lack of information on financial indicators or poor fundamentals. Poor dynamics in reporting (for example, bad dynamics of quarterly reports), large debts, lack of sales. The price growth is only on expectations, the company has no sales or they are very small. The company may be on the brink of delisting, funds do not invest in such companies;
– there is information on the repurchase of shares or, conversely, there are constant additional issues of shares. In general, pay attention to the number of shares issued and traded on the market.
3. Types of Pump and Dump
3.1 Chart, that has levels on the left.
In the example CODX share has level in the form of high last year:
Pump that meets levels on its way is a proper model for opening short positions. You need to look entry point to the level.
3.2 High in air.
Share is rapidly increasing and there are no levels on the chart minimum for a year. In the example IMTE share launches from price 2$ to 44$ in two days:
3.3 Parabolic rounding.
SMRT share on the chart at the end of movement has three long vertical climbs. Fourth is opening with gap up above the high of the previous day, breaks round figure in 4$ and does not keep on it. Three vertical climbs and following opening with gap are good signs:
Although, this example is not ideal. There are savings in the area of $ 2, $ 2.50 on the chart. When there are savings and small kickbacks, share can go up for a very long time. In addition, growth from $ 2.5 to $ 4 is 60%. In percent this is a good indicator, but it is better when the price grows by 100% or more. As an advantage of this model, can be noted that during pumping for several weeks on the chart, you can see the history, levels and potential of the deal. When such pumping finishes with a parabolic rounding, then a subsequent drop can give entry points for several days.
3.4 Opening with gap.
OMEX share opened with gap. Closing of previous day was at 3,8$ and opening at 13,30$. Growth was 250$. Such level of prices was more than 3years ago, that’s why such jump will find those, who will close their positions:
Gap should be at least 100% (in this model percents are very important), a sharp increase in trading volume. You also need to look at the behavior of the price for post and the premarket, which levels are formed in the premarket, and trade from them. We go in short at breaking through the opening price. It is also good when there is gap at the end of the parabolic movement. We saw it in the example, when we considered the previous type of pump and dump. Gap can mean the end of the movement. A good signal is when share opens with a gap above the previous day’s high.
Next, I would like to mention here about the model, which should be traded with great care. In the example below, share I (Intelsat S.A.) traded on the NYSE increased from $ 3.6 to $ 17.76 in 2 months. The growth was almost 400%. Growth goes without strong kickbacks, with savings:
At the initial stage of the climbs are not of excessive size, as growing volume of trades does not go down. Share is traded on the NYSE, which also needs to be written as disadvantage. On this exchange, in contrast to the NASDAQ, pumps and dumps work worse. Such, as in the example, pumping for several months can also be considered as a separate kind of pump and dump. The entry point can be searched for when the upward movement begins to accelerate and ends with several (at least three) large vertical climbs with a volume exit or opening with a gap.
4. Selection of shares
First of all, I need to say that in this article we look at shares, traded on NASDAQ, NYSE и AMEX. We do not consider trading on OTC Markets; this topic is for another article. To know more detailed information about OTCBB, you can visit Investopedia.
You can look at documents, statistics on the OTC market on finra.org. You can work with screeners on this market: otcmarkets.com, finscreener.com.
Shares for trading with NASDAQ, NYSE and AMEX you can choose, using different filters, following news, getting newsletters from sites on penny stock topic. There are a lot of resources on this topic:
Tracking news and PR-companies, you can search for papers that are at the initial stage of pumping. Also we can use filters. If we are interested in stocks for growth, then we are looking at prices from 0 and do not put a filter by volume. In addition, if we are looking for stocks to buy, then we use a fundamental analysis, we’ll talk about it below. We need to look for companies that generate money for shareholders.
More often in the strategy, pump and dump are looking for rapidly grown papers to open a short position in them. To find suitable securities, you can use, for example, services finviz.com, finance.yahoo.com. We are interested only in stocks, ETFs should be excluded from the search. We look at stocks with prices up to $ 20, with a current volume of more than 100 thousand, and sorting from the most grown (top gainers) to the least grown. We are interested in companies, which made for a week from 50% or more. A good move is 100%, and in dollars – 2 dollars. With the potential to move down to the 1-st dollar (we are counting on 30-50% of the upward movement). The stock should make a good vertical movement, preferably from 3 long green climbs (3 days of growth) on the chart or more.
In finviz you can use different ways of filtering and displaying results. In the Performance tab, you can filter % of the price change for the week, month, quarter. In the Snapshot tab you can display graphs, fundamental indicators for companies and their description, read news on the most grown stocks. In this link, are filtered the most grown stock in a week.
On the charts, we look at levels, round figures in prices (25, 50, 75 cents, dollar), whether the volume falls, whether there are accumulations and kickbacks when moving up. If there are small kickbacks, savings, short daytime climbs, then these are bad signs for trading pumps and dumps. This means that the stock can accumulate strength to continue the movement. Such actions should be avoided, we should be interested in explosive vertical movements with the output of volume.
There is one more point about the volume that is worth mentioning. Shares with a volume of up to 10 million a day – this is the best option for trading. There are fewer large players, scalpers. With a trading volume of 20 million a day or more, it is hard for novices to trade securities.
Most often, pumps and dumps can be found in the sectors Healthcare and Technology. The most interesting sector is Healthcare. In this sector, there are many companies that are at the development level and there are no sales, just news. There are sectors, where pumps and dumps should be avoided. For example, such sector is Basic Material. The cost of companies in this sector depends on changes in commodity futures prices, while in the sectors Healthcare and Technology, pumps and dumps work independently of the market as a whole.
5. Fundamental figures
When looking for shares on shorts, we are interested in unjustifiably inflated companies with poor fundamental figures. The increase in prices of such companies is on expectations. When conducting a fundamental analysis, you need to pay attention to the following indicators:
– P / S (price-to-sales ratio) is more than two;
– lack of sales revenue or it is small;
– Increase or decrease earnings per share (EPS);
– we look, what size of market capitalization is;
– we look, what size has Profit Margin. This ratio shows how much the company earns from each dollar of sales;
-we are interested in operating margin, Return on assets (ROA), Return on equity (ROE), Revenue, Net Income, Total Cash, Total Debt, what is the Current Ratio.
It is also useful to study Income statement, Balance Sheet and Statement of Cash Flows. In Income statement we are interested in Net income applicable to common shares.
In Balance Sheet we look at the indicators related to the assets: Total Assets, Total Liabilities, their ratio, and Net tangible Assets.
In Cash Flow Statement we are interested in the Total Cash flow from Operating activities and the result in the form of Change in cash and cash equivalents. Cash flow statement shows whether the company generates a flow of money from its core business. The company can issue shares and earn on it, and not have revenues from core business. Investors are interested in Free Cash Flow. This is cash that remains at the disposal of the company after spending. Cash is needed to maintain and / or expand the company’s asset base. Free cash flow is important, because it allows the company to use opportunities that increase shareholder value. If we are looking stock for long, then we need to look for companies that generate money for shareholders, and for short, respectively, companies that do not create a flow of money.
6. Formations of Pump and Dump
In general, the formations for trading are standard enough – this is either a hang-over or level breakdown. A feature of pumps and dumps is trade in imbalance, which arises from strong vertical movements. Vertical movement can even be viewed as a separate formation.
6.1 Short from levels.
The chart has a level or a round number. Open short after the rollback from the level. For example, after a strong movement, the price didn’t hold on a round number. At Level 2, appear big sellers. There is a first downward movement. It must be significant, 50 percent or more from upward this day, so that it is clear that this is not a rollback, after which the movement will continue to rise. Then comes a rollback upwards, which is 70-80% of the first move down. At this retest level we go into shorts. This point gives an understandable, reasonable stop. The model for long differs from the short. If we are going to take for long on the first strong day, then the price should break a round number, gain a foothold over this number without a rollback and continue the movement. You can use premarket levels to log into the long.
If we are looking for an entry point to the short after a rollback, then we must pay attention to the nature of this rollback. Rollback should be with small climbs and on reduced volumes. Also, a good point for short could be entering the next day, if the stock again rolled back to the level and made a second retest. After a second retest, the stock may fall even more. In the example below, the CODX stock after the strong growth in the previous days opens with gap, approaches resistance, which is about $ 6.50, does not hold at that price, and makes a strong pullback to the low of the day. After lunch, a good point is created at the retest to open a short position:
To trade pumps and dumps, we use the daily chart, 15-minute, 5-minute and minute. On the daily chart we look at distant levels, and also how much the stock was in dollars and percent. We trade on a one-minute chart (especially when we work with a sharp vertical movement), at a 5-minute look at the trend inside the day, what levels are formed. The position is held on a five-minute chart. At the 15-minute look at the potential of the movement. The potential in deal is calculated from the point at which the movement began and in which increased volumes appeared. From the high of this movement, can be expected a decline of 30-50%.
In pumps and dumps, work the simplest tools for graphical analysis. Horizontal and sloping levels, levels of premarket, round numbers, the opening price, the breakout of the low day, the high of the previous strong day as a resistance level, a false breakout of a level or a round number. In the example with the CODX stock, note the sloping up trends that were in the morning. In the screenshot, you see two trading sessions, when this trend breaks down in the second half of the day.
6.2 Short at breakout of level.
In this model, we are waiting for the lateral movement, the formation of the level, the decay of the volume in lateral movement and on the breakout of this level downwards, on an increased volume, we go into shorts. Such deals work better after lunch (after 12:00 New York time). A good entry point can be a breakdown the day’s opening price. This means that on the daily chart it is already a red bar, which is a signal of weakness of the stock and in general, breaking the low of the day is a sign of weakness. Breaking the 2-day low is another big weakness.
The example of breaking through the level in stock I is not ideal, but in real trading, ideal formations are not so often. In general, good pumps and dumps appear not every day, it’s not a daily trade. So, stock I is traded on the NYSE, which is already a big minus. After three months of growth by almost 400%, the stock stopped around $ 18. The share opens with a gap under the level of $ 18 and bounces twice from this level. In previous days, from the level of 17.50 $, the stock was falling heavily. In stock I we have a graphic level and a round number of 17.50 $, which itself is also a level. Bouncing from $ 18.0, the stock begins to settle on lower volumes over $ 17.50. Then, the level of 17.50 $ breaks through and the volumes rise. In case of breakdown of the level on increased volumes, you can open short:
6.3 Short of vertical movement.
In this formation inside day volume in a five-minute session on large volume form several big climbs without kickbacks and savings. 3-4 large green climbs in a row, in most cases, form a reversal point or, at least, a strong pullback. The stock must go up at least 50%, and preferably 100%. The more price percentage went up, the stronger it will fall. Climbs should be at least three times more than usual. Advantage will be appearance at the end of movement the bar with a long shadow. Then, after a strong upward movement, stocks cannot keep the price on a round number, on Level 2 appear large sellers. You can try to go into short.
In the example, the TPIV share with the opening made a strong move on large volumes. In 15 minutes, it grew by more than 50%. From round number 8.50 it would be possible to try to search entry point:
In all formations timing is important, a time when it is better to open a position. It is very dangerous to short in the first 15 minutes of trading and generally before lunch. Often before lunch, there is growing in pumps and dumps. It’s better to look for the entry point to the shorts after 12:00 New York time.
7. Rules of trading
In conclusion, I would like to say about some general rules for trading pumps and dumps. They are as follows:
– one of the common mistakes of beginners to trade this style is to try to short papers that have grown less than 50%. The share should grow by at least 50%, and better by 100%;
– never short the share before the quarterly report. Never short if the report is good and the stock continues to be pumped up. Wait for the report to be released, analyze it and only after that look for the entry point. Pump and dumps are best traded between the quarterly reports;
– never short on the green climbs, simply because the paper has passed 100%. Wait for a stop, a turn and a point where you can put a valid stop;
– do not short in the first days of a big movement. Wait for the stop, the start of the turn, when there will be a splash in the volume, and then its attenuation will come. Look for the entry point from the strong level;
– on the first strong day never expect that the stock will have a strong potential to fall. On this day, most likely, there will be small kickbacks of 10-15 cents. The fall is more likely to occur the next day;
– shares in which pump and dump have been previously made, the next pump and dump will do less in size, and the price will not reach the level of the previous pump. Since at the levels of the old pump there are still locked unprofitable positions that will be closed;
– do not short if the company has news of signed contract with another company, if the stock began to pump on the news of the FDA. Also, be careful before the quarterly report, before the news from the FDA or when there are rumors of future contracts. When such news appear, traders can start closing positions;
– be very careful to short until lunch New York time;
– approach more strictly to the selection of pumps and dumps in shares traded on NYSE and AMEX. Pump and Dump on NASDAQ are moving better;
– do not trade shares which have small volume of trades (less than 100 thousand). It is easy to manipulate such stocks, they often take off stops;
– be careful on Friday. Before the weekend, many traders close positions. If the stock fell in previous days, then because of the closure of shorts at the end of the week, it may start to grow;
– if the stock has a large Short interest (more than 20%), sooner or later shorts will be closed, and at this point the stock will begin to grow rapidly. With this, by the way, there is a trade model like Short Squeeze. Short Squeeze can be expected after the stock has made Pump and Dump. For example, the stock has good fundamentals, and a one-day price shot occurs when someone closes shorts;
– to exit the position, place limit orders, because, for example, from the level at which you are going to exit, the price can make a quick rebound;
– do not move the position the next day with your leverage, trade for your money. When you move the position the next day there is a risk of unexpected news, and the stock can open with gap against you;
– never average out and observe risks. Put a risk on a day of 5% of the deposit. Risk for the trade set at 1/5 of the risk per day. Risk per day should not lead you out of psychological balance. The position volume is calculated based on the risk to the position and size of the stop, which is necessary in a particular trade. Make a table in which it will be pointed, what position size you will take depending on the risk in the stock, so that not to engage in these calculations during the bidding process;
– as a general recommendation, suitable for any strategies and trade styles, I would strongly advise you to keep a detailed diary of transactions. Record everything. Take a screenshot of the graph, the reasons for entry, stop, exit, what was on Level 2, what emotions were. Collect transaction statistics. Only statistics will help to understand what works and what does not.
Also, before you start trading pump and dump strategy, you need to clarify a few issues related to the broker. First, what will the commission be? It should be no more than 0,8-1 dollars per 100 shares. What are the conditions for transferring transactions the next day? What leverage and how many percents does an annual broker take over his leverage? In general, as I already wrote above, it is better to move the position without a leverage at all. Of course, the broker should have a free terminal. You do not need unnecessary constant expenses. Ask broker what short-list he has. Is it possible to order on short non-shorts for additional price? Can one leave a short position the next day? Is it possible to leave the position in short for shares less than $ 5?