Pump and dump schemes are illegal market manipulation practices that have existed in stock and cryptocurrency markets for a long time. With the rise of cryptocurrencies, these schemes have also moved to new markets.

What is a Pump and Dump Scheme?

A pump and dump scheme is a market manipulation tactic where perpetrators artificially inflate the price of a specific stock or cryptocurrency through false promotion or manipulation. Once the price reaches a predetermined level, they sell their pre-owned assets, making substantial profits. Typically, these assets have low liquidity and are easy to manipulate.

As the perpetrators sell their assets during the price surge, new investors face significant losses.

Process of Manipulation:

1. Target Asset Selection: Manipulators usually choose low-liquidity penny stocks or small-cap cryptocurrencies, which are easier to control due to limited market participation.

2. Price Inflation: Through false promotion, fake buy orders, or other tactics, manipulators lead a large number of investors to buy the asset, causing its price to surge quickly.

3. Profit Taking: When the price hits the target set by the manipulators, they quickly sell their assets for huge profits.

4. Price Collapse: As manipulators sell their assets, a flood of sell orders hits the market, causing the price to crash rapidly, leaving investors with significant losses.

How to Identify a Pump and Dump Scheme?

1. Unsolicited Recommendations: If you receive unsolicited emails, phone calls, or messages recommending a specific stock or cryptocurrency with promises of "guaranteed" returns or "massive profits," this is a common sign of a scam. Such promises are usually not reliable, and investors should be cautious.

2. Fake Social Media Promotions: Social media platforms (like Twitter and Instagram) are frequently used to promote specific stocks or cryptocurrencies. Scammers often use lavish displays of wealth (such as expensive watches, luxury cars, private jets) to build credibility. These accounts typically have many followers but may already own significant amounts of the recommended asset, selling them as the price rises.

3. Lack of Transparency: Conduct thorough due diligence before investing. Transparent companies should provide easily accessible financial statements and information about their executives. If company information is hard to find or lacks transparency, it might be a sign of a scam.

4. Wrong Number Scams: Some scams involve sending voicemails from unknown or irrelevant numbers, promoting a stock about to "blast off." Many people, without verifying the information, fall for these scams, driving up the stock price while manipulators sell their pre-owned stocks.

5. Discord and Telegram Groups: This type of scam is increasingly common in Discord and Telegram groups. These groups often target low-volatility small-cap cryptocurrencies. The larger the group, the more significant the price surge can be. Members are instructed to buy at a specific time, causing a rapid price increase, while manipulators sell off their assets.

How to Trade Pump and Dump Schemes?

Despite the high risk, if you choose to engage in pump and dump trading, here are some strategies:

1. Choose the Right Time Frame: For assets promoted through social media or group recommendations, use the 1-minute (M1) time frame for trading. Given the rapid price fluctuations, entering and exiting the market quickly is crucial. For stocks affected by fake news or misleading information, daily or weekly charts may be more effective in identifying broader trends.

2. Best Entry Timing: For assets recommended by groups, enter immediately after the release. For other types of pumps, wait for a strong daily or weekly candlestick, accompanied by high trading volume, which indicates significant market interest. This serves as a signal that the market is beginning to move.

3. Profit-Taking Strategy: Due to the high failure rate, aiming for substantial profits is advisable. You might consider taking profits gradually as the price increases. For instance, if the price surges 10x, gradually exiting the market might be a more prudent strategy.

Final Considerations

Pump and dump schemes are extremely risky. It requires high skill and a bit of luck to profit from such trades. Even if charts look promising, the volatility during pump and dump phases can be intense, causing orders to open and close at unexpected levels. If you decide to try trading these schemes, proceed with caution and use only capital that you can afford to lose.

Summary

Pump and dump schemes involve illegal market manipulation to inflate asset prices and achieve profits through deceptive means. Key indicators of these schemes include unsolicited recommendations, fake social media promotions, non-transparent companies, and wrong number scams. Discord and Telegram groups are common platforms for these schemes, featuring rapid and short-lived price movements.

While trading pump and dump schemes is possible, the risks of losses far outweigh potential gains. Investors should rely on independent judgment and thorough due diligence before engaging in any trades.