[Trading] – trading on declines – pump and dumps


In recent months, again, I focused more on cheap stocks; on so-called pump and dumps, about which I already wrote repeatedly. Pumps are companies, which not necessarily on the basis of any news – generate a very strong growth movement. As soon as it comes to the increase, it may also move downward; resulting in many cases with a return to the place of breakout. It is not a simple trading, even though the charts often may point something else. Today I will tell, how not to lose everything by trying “your luck” on this type of companies. Either you have strategies on them or you will lose faster than you think.

What charts I’m observing

Let’s begin with the fact that in terms of shorts – I observe 1 minute graph, from which I take main signals to open the position. Additionally, I have launched 5 minute chart. But it doesn’t constitute the base for me to open the position. 5 minute interval I use to search for support/oppositions on which may appear stops of movement generated from 1 minute.

Take a look at the following chart of DRYS Company. Many people entered into short, just because it strongly increased. That it won’t go any higher, etc., and so on. Typical lost in a daydream of the beginners, as well as those who think that they are the best, without results or setup up to which they trade.

pump and dumps

I marked three potential places in accordance with the principle – it won’t go any higher, let’s take short:) That is trading without the strategy. It would be good provided that each of such strong decreasing candles would be followed by closing the position, but the logic of thinking for the beginner usually expects that the rate should decrease definitely more strongly, and the small profit is too small profit. There is often a plan to leave overnight. Thanks to such behaviour of traders, by the gap of consecutive day, there is a panic getting rid of shares by those having shorts. Often such a move is followed by the formation of interesting layouts, up to which it is possible to start trading on short. About it below:)

NOTE! Signals to open the position I observe on 1 minute interval. Potential levels of exit from the position (if support will work) or places where the move can gain momentum I observe on 5 minute interval.

Statistics are significant, but timing is important

Of course, if we look at statistics – companies from so-called pump and dump group with greater probability will fall from where they started. Usually simply nothing is behind the movement, except PR campaign, or pumping in trading rooms. The problem, which you may have, is that you enter into short too early and it will strongly pull you down, all the way to cleaning the deposit. In the recent time, there were a lot of examples of companies which started from 1$ reaching 3$ or 5$ in one session, having 10k$, and pricing at the level of e.g. 100 mln$. And now what? You will take a short from the level of 5$, only because there has been 500% increase? What will you do when such a decision will make hundreds of traders as you? And day later when the rate will open at 5.50$ everyone will start to close shorts, raising the rate. It is a fast road to margin call. Of course, sometimes you may be lucky – probably you will remember only those transactions:) It’s a standard. You should find the repetitiveness seriously, it’s not so hard. However, it requires a bit preparation from you. It really bothers me that beginners need to enter positions “because something there it seems to them”. What won’t you give a greater statistically chance of success in trading? Remember that nobody is rushing you, here it isn’t necessary to be in a hurry.

Below a few examples of companies in order to show that statistically companies, which have no actual value, but their news and PR is a bullshit – they finish as they end. However, what is happening between is very important and what’s more “between” can finish your account and destroy nerves 🙂

Take a look at the graphs of companies below. Can you see this repetitiveness: strong growth (up to few sessions – typically parabolic movement), sudden reversal and return in areas of breaking. We could say easy moneys. However, the moment in which you will open the position is a key. I trade day trading, so I seek reverses on them. I don’t trade perfectly, don’t catch tops on short – I’m not a master:) I can be late for a perfect entry, but it is better to lose a few or several cents of movement than to be too early 50 or 150 cents of the movement.

Some examples of pump and dumps

pump and dumps

pump and dumps

pump and dumps

pump and dumps

pump and dumps

pump and dumps

The importance of volume when watching pump and dumps

Volume is the key to, generally speaking, look at the company. If the turnover doesn’t stick out from the standard (average daily turnover of the company, or you do not see the growth of liquidity on the given company in relation to the period of previous day), then I don’t consider, at all, to trade on the given company.

How I find such information? I will provide you two solutions – one is free and second paid. As you can guess free has its deficiencies. It simply relies on data delayed for 15 minutes. In case of one of my strategies, such a delay isn’t significant. However, in case of what I describe in this article, 15 minutes delay isn’t acceptable.

Option of company’s review, which have increased volume in relation to the standard using Finviz.com; you enter finviz.com –> next you choose Scanner. I’m interested in two fields:

  1. Relative Volume

  2. Current Volume

Below I present an example video, which shows how it looks like from the found companies and what it means looking at the chart.

In the session I use Trade Ideas and scanners, which rely on it. I already twice wrote about it, therefore I refer you to the following articles, where you will find information, how I’m searching for companies.

  1. Low float stocks

  2. Hot stocks – how I find “hot” companies

What is the key for me in opening/closing the position

There are two aspects to which I pay special attention. Today I will tell about one of them; The one, which is more important for me, and about the second one a bit later. It is not a secret knowledge, is one of the simplest things in trading.

Let’s look one more time at recalled earlier DRYS chart. It is a graph from one of the last sessions when I was trading on it. Characteristic on the pattern is significant for me:

Drawing interesting me pattern

pump and dumps

What can you see on these pattern? Answer yourself to this question, the best taking notes. Then go to the following note.

Notice that a strong growth on DRYS Company was in the initial phase of session. It drew local peaks in 6.30-40$. The first of these movements was followed by correction, then another approach in the level of 6.40$, and then again correction. It would already seem that the rate will break up – reached the level of 6.45$. Therefore, I marked on the graph that I recommended the first layout to traders with experience. Another attempt up to high on the larger volume could trigger a decision to open the long position. Which, of course, I don’t negate; often such layout ends with further growth. However, observation of the tape is significant – tape reading. In this case, what unfortunately on the graph isn’t possible to see – there was only filling out the rate. With the price of 6.40-45$ have been collected all large orders from the offer side. Followed by a huge volume, which in one candle fills the rate from these levels to the level of 5.80$.

Here began to draw the second one, we can say that already classic layout for movements of this type.

What can you see on the following chart?

pump and dumps

Here the pattern of candles is significant. On the reverse, each breakout is used only for the sale of shares. It is great, when on rising a hidden order appears on the offer side. In addition, when after bid a larger purchase appears – however not real, and such which only artificially creates the impression of demand, and then after choosing offers are quickly erased. It’s the best layout that foreshadows the continuation of movement. After which as can be seen a great decrease was generated. In my case, the entry was in the level of 5.62$ with partial exit at 5.41$, and then with taking when the rate chose important support.

Why I mention this level of 5.40$. As I indicated at the beginning of this article, I use 5 minute intervals to close the position or as the level, which can lead to precipitation of the movement. In this case it reached to precipitation of the movement. Conservatively, I carried out the part of profit, however when I saw that there would be a good continuation, I increased the position again. Below 5 minute interval – marked supports, which were significant for me in case of movement reversal:

pump and dumps

Carrying out this layout on increased volume

The volume is significant in such movement. When it isn’t on important breakouts or generally on drawing the layout – I DO NOT TRADE! Growth movement generated on zero volume – is too uncertain, too easy to continue filling or appearance of suddenly wide spread. In case of DRYS – look at changes in volume in key levels of movement. Of course, it is a volume which can see “AFTER”. But in the course of its generation, trader can see that there is more volume – by the number of transactions or size of transactions, which are visible on the transaction window.

pump and dumps

When I trade this layout

The most important for me is drawing the layout within maximum 1 session hour. As on the above example – this movement was generated within the first hour. Note what happened later. The volume drastically decreased, volatility also strongly decreased. This doesn’t mean that there was no money, but it wasn’t so “easy to read”.

What to look for

If this article inspired you to try trading on companies of this type – I’m very happy! But remember not to start suddenly. Start with observation of such companies, devote a little time for analysis of what is happening, to find repetitiveness, to understand with whom you are trading on the market and how important is to follow your principles. In trading on pump and dumps – the key is your strategy, which you understand and use without unnecessary hesitations. I’m not saying this just like that. You are simply a new trader; you don’t pay so much attention. I refer you to two articles, which should make you aware that in spite of the fact that statistically companies are coming back (those which movement is without cover, not on the basis of results, news – simply craze over and emotions which moved the rate), you can experience a very painful lesson.

Read this article:

  1. What is the risk of trading on declines


Leave A Reply