In Season One of the Steady Trade Podcast, hosts Tim Bohen and Stephen Johnson offered a foundational education on important things that every new trader needs to know. In Season Two, they are continuing to build on that education by teaching you what you need to do to springboard from education to actual trading.

One of the main things you’ll need to successfully transition from student to day trader is a strong understanding and mastery of patterns. While to a certain degree this is something you’ll learn over time, there are several key patterns that repeat themselves so frequently that you need to know about them. One such pattern, and the subject of Episode Four, is the pump and dump.

What is a pump and dump?

This jitter-inducing term is thrown around a lot in trading. But what exactly does it mean?

In essence, a pump and dump is a controlled inflation of a stock’s price. Typically, it’s engineered by individuals who have access to a lot of the stock and want to raise its value. However, the actual production will likely involve many players; it might be initiated by a shareholder, but then executed by promoters.

They will knowingly inflate stock prices through various promotional efforts (the “pump”). Once the stock’s value has been raised considerably, the aforementioned individuals unload the stock rapidly and in great quantity, earning profits for themselves but overall lowering the value of the stock for the others who bought in and helped raise the price (the “dump”).

The evolution of pump and dumps.

When many people think of the pump and dump scheme, they think of a boiler room format, a la The Wolf of Wall Street. However, pump and dumps aren’t always quite so blatant, nor are they conducted by smooth-talking salesmen in dimly lit boiler rooms.

In the 90s, pump and dumps migrated to the internet. Emails, chat rooms, online forums, and hard copy mailers would be used to inflate the prices. Today, pump and dump inflation efforts might be conducted via internet channels and social media channels. Because of this, it’s not always easy to instantly pinpoint what is and what is not a pump and dump.

Identifying pump and dumps.

Identifying pump and dumps isn’t always as easy as it sounds.Promoters have gotten smart to the fact that a big and rapid spike is a red flag. As such, these days, many pump and dumps are engineered to “walk” or have a more gradual price raise. Basically, they want to keep people in until they are ready to sell.

In the episode, Tim and Stephen offer some specific tips on how to identify pump and dumps, and offer advice on how they have changed over the years. They also offer tips for how to get an edge on it so that you can begin to follow a successful model for trading pump and dumps and formulating a plan.

Using pump and dumps to your advantage.

In the podcast, Tim and Stephen talk about successful traders like Tim Grittani and Tim Sykes have used pump and dumps to their advantage. They discuss specific approaches and ways in which these traders have gained an edge which has helped pump and dumps make them money.

Do you want to use pump and dumps to make money? Time, technique, and lots of research are necessary to make it work. Tim and Stephen discuss the pros and cons of working with pump and dumps and offer some great advice for how you, as a trader, can consider if this is the right direction for you.  

Remembering your foundation.

Tim passes on a saying that “Markets can stay irrational longer than you can stay solvent.” Remember: you can be right about identifying a pump and dump. However, unless you get in at the right time, you can lose a lot of money. By remembering your foundation and following Tim and Stephen’s tips to figure out a specific plan, you can reduce the risk that comes with investing in pump and dumps.

Win big!

A new season of the Steady Trade Podcast means an all-new giveaway, including a Stephen Johnson pillowcase (and, you know, other things like a Macbook pro, an Apple TV device, an iPod touch, an Apple Watch, a $100 gift card, and 3 months of Stocks to Trade). Just like in Season One, there’s also another “Greedy Little Bastard” prize, which includes all of the aforementioned items!

Visit our giveaway page for more information, and stay tuned for Episode 5!