The price trading of a commodity in any type of investment market will be controlled by two special things, namely supply and demand. Where the desire is high will lead to a high price as well. But, what happens if the desire is the result of a manipulative pattern? As intended in the term what is pump and dump.
Pump and dump as a term that refers to a pattern made by a person or a group of people who have an interest in inflating the price of the assets they own, before the price of the asset experiences a marked reduction in value. Pump and dump is considered an illegal practice. Under the securities laws, some actors in this practice will be subject to large fines.
Actually, how does this pump and dump pattern work? This article will answer that question, as well as review further on the understanding of what pump and dump is, the types of patterns, and steps to avoid them.
Literally, pumping means to pump and dumping means to throw away. So, what is pump and dump can be interpreted as the treatment of a trader in pumping the price of a stock to rise, then discarding the stock after the price rises.
The term pumping is used to denote the purchase of a particular stock or commodity asset in large quantities to drive the desire for that asset. The less number of assets in the market will automatically make the asset price increase. When demand and prices increase, large traders who accumulate assets will dump or release assets until pric s drop markedly in the market.
Some pump and dump actors or commonly called scammers usually take advantage of market dynamics from supply and the desire to make investors see price movements as a normal trend. In some cases, scammers will target new or perhaps unknown assets to avoid spending large sums of money while engineering the market.
Pump and dump practices are generally carried out by traders who are sufficiently influential and include influencers who are paid to provide references based on false, distorted, or exaggerated confessions. As already stated in the understanding of what pump and dump is, this practice is a strategy of some traders who are very interested in getting quick profits from small “anxious” traders.
Where this event does not occur automatically as a result of the accumulation of business transactions, supply and demand for assets in the market. But there is an experimental game of some of the big traders to make the anxious situation interpreted.
This pattern begins with a trader or his group making purchases and accumulation of investment assets. The accumulation is carried out slowly and gradually. They do not immediately buy in large quantities. Therefore, it is not surprising that this pattern can last for several weeks or even months. After that, they will direct some traders to buy certain assets by explaining that they have inside information.
They will spread false information to the media in order to create positive sentiment on related assets or companies. They will work with influencers who are new to investing and ask to market certain stocks to their followers. When there is a scarcity of assets and prices soar, this situation will create panic buying. The event signaled a successful stacking strategy and would lead to the pump state continuing.
The price of the lumped asset can then increase up to 2x. When that happens, the scammers will release the asset slowly and small traders will replace the ownership of the asset.
In the following event a dump trading is executed.
When market prices go haywire, some traders will sell their remaining assets. The offer on the asset will then lower the asset’s price in the market. As asset prices fall, some small sellers will be attacked by panic selling.Where they will dispose of the asset at a low price which further lowers the asset’s price in the market.
In the end, they will suffer losses due to such rapid and striking changes in market prices.This kind of loss tends not to be felt by some of the big traders, because they trade in large numbers and have mastered the timing or marketing events.
The price reversal process actually happened in just a few moments . So, the process that takes a lot of time is in the process of accumulating assets when it will be stacked. The pump and dump pattern is also divided into several types, including the classic pattern, the broiler room pattern, and the wrong number pattern.
In this pattern, traders spread false information to small, less experienced traders.The trick could be to call the retailer one by one and explain if he got inside information, or perhaps by spreading false information through the media.vcx