How To Profit From Pump And Dumps

Before you read this, you need to understand just how risky buying pumps can be. Once you understand how pumpers operate, look back at previous pumps in order to gain some understanding of how they have done in the past. An important rule that seems to be commonly overlooked is that just because a stock is being pumped, does not mean that it will go up.

Today BFLX was pumped by Best Damn Penny Stocks (BDPS) and it's affiliates so I will use this stock as a model for what I'm about to say.

Basically there are only two groups of pumpers who I am comfortable buying after the initial announcement. One of them is BDPS and the other is Awesome Penny Stocks/Crazy Penny (APS). In my opinion these are the only two pumpers to offer a decent risk/reward ratio in the beginning of the pump. Make this decision for yourself though. There are certainly other good traders out there who are confident in trading other pumpers and likely some good traders who wouldn't trade these pumpers at all. Always do your own research to verify what others have told you!

When I say the beginning of the pump, I literally mean the absolute beginning from the time that you can confirm the stock is actually the pick. Often there will be abnormal volume the day before the announcement as a result of front-running. Front-running is buying the stock before the announcement so as to ensure maximum gains. The problem is that without confirmation, front-running is based purely on speculation and thus is a foolishly risky strategy. One such stock that was front-run today in anticipation of the BDPS pick was HPCS.

As you can see, the stock panicked massively in the morning as the front-runners realized they had been mistaken and scrambled to cut their losses. Not only can you lose big money from the strategy, but you end up missing the actual pick by having to concentrate on your losses. The lesson here is to never buy a pump on the rumor that it will be pumped by a big pumper. Wait for confirmation from the pumper's emails or website!

To buy among the first, you have to be quick. You can't just haphazardly be checking your email and buying new pumps when you see them for the first time. Fortunately, the big pumpers will hype up their pick announcement days before so you can know when to prepare. If you want to trade the pick, you will have to be waiting by your computer, finger on the trigger. The two most common times for big picks to be released are at the market open and 2 pm EST. If you can't afford to be at your computer screen the whole time when you know a pick is imminent, at least devote your full attention to trading during these two times.

So how do you confirm the picks before everyone else? There are two main tools. The main one should be to create a separate email account for all of your pumper subscriptions. Sign up to every free email list that advertises big penny stock picks under this new email address. To find out where the best pumper lists are, you'll have to do your own research. That's a whole story on it's own. Once you have your new email account, keep it open when you are expecting a new pick. It's a good idea to use an an email provider or email client that allows you to set alerts when certain people send you an email. By doing this, you can configure your email to play different sounds or send a pop-up whenever one of the big pumpers releases their pick, giving you one more advantage over other traders.

The second tool is an add-on for firefox called check4change. Within the emails teasing the new picks, good pumpers will often give you a web address that will announce the pick at a specified time. By using this add-on you can continually check that page for changes in the background so you don't have to waste your time manually refreshing the page yourself. Keep in mind that sometimes the web page will announce the pick before the emails, and other times the opposite happens. You need to be prepared for both scenarios in order to ensure the best possible trade.

Once you have the pick confirmed, you need to act quickly; send your orders in within seconds otherwise you won't get filled. This is one of the dangerous aspects of the trade. Since you have to act so quickly, it's possible to do your math wrong and take too big of a position, or worse still, mistype the ticker symbol and buy a huge position of a worthless stock. To minimize these risks, prepare beforehand. Make sure you're focused completely. If you've had a sleepless week, it may be best to sit out the pick as you can always wait for the next one. Think beforehand how much money you are willing to risk on each potential price bracket: If the stock is trading at 10 cents, how many shares will I buy? What about 50 cents? How about $1.50? By addressing these questions ahead of time, you save yourself time and stress. It may also be helpful to have orders ready to go on a few stocks that have been rumored to be the picks. As I said earlier, do not trade these before confirmation, but having the orders ready to hit transmit can make things much easier (no promise any of the rumored stocks will be the right one).

DO NOT CHASE! Chasing is sending orders higher and higher as you follow the price upwards. This is the best way to lose your money. If you send your orders and it doesn't fill, do yourself a big favor and just accept it. Missing an opportunity is so much better than losing a huge chunk of your account. To increase your chances of a fill, set your limit order a few cents or percent above the ask (Never use a market order for any of your trades, including those outside of this strategy). Often times people will miss their fill, see the stock rising rapidly and want to get in on those amazing profits so badly that they foolishly buy into the stock after it has already jumped 20%, 60% or even 100%. This can all happen within the first 5 minutes of the announcement and indeed that is likely to be the case. Even though the stock may look strong and the promotion has only just begun, you have no way of knowing how far it will go. The best way to get an idea of this is to look at previous pumps by the same pumper. In nearly all cases though, it is not a good idea to buy the stock unless you can get in within the first few seconds. Breaking this rule will mean a poor risk/reward trade. You may get lucky and make money, but more often that not, you will lose a great deal of money as the stock panics and falls. Do not think that you can rely on tight stop losses because these stocks tend to be illiquid. If the stock panics, it will be nearly impossible to get out as everyone rushes to sell to the extremely few buyers that exist. This leads us to our next point:

If you do manage to get into the stock, be ready to sell just as quickly as you got in. There is no way to predict the top so be ready to assume that the current price is the top. Have your sell order ready to go as soon as your buy gets filled. If you are confident that the stock will stay strong, at least take some profits to minimize your risk. In some cases it may be permissible to account for this by taking an over-sized position in the beginning and immediately scaling down to take profits and reduce risk.

I hope this guide will give some of you a better chance of coming away from these pumps with more money for less risk. As always, confirm what I've said yourself. I suggest you just watch your first few pumps without trading them to get an idea of how they perform and the amount of time you have to trade them. Paper trading probably won't give you a realistic idea of how this works though because the fills for buying and selling are half the battle.