The smaller the float of a stock is the lower the barriers to manipulate its price are. The penny stock markets are the Eldorado for pump and dump gamers. The small float allows even single scammers to play this game, but usually they operate concerted.
Large cap stocks are also manipulated, namely by the big banks. They send their customers analyst opinions and these buy or sell the stocks then. Even better, the media broadcasts the price moving information for them.
There is a law that involves Chinese walls, a construct meant to isolate the analyzing department from the trading room and the investment banking. But that’s a theoretical firewall. In the real world things go more hand in hand…
Let’s see how in the penny markets the pump works. It is outright simple. The penny stock promoter sends out some emails or postal newsletters that are recommending to buy some usually very cheap stock.
This boiler room operator may even spend his valuable time to convince a potential investor – the lemming – on the phone. And the lucky receiver of the penny stock pick then buys this super stock that is deemed to go up threefold during the next days.
The strange thing here is that the promoted stock often or even always goes up. It takes off vertically, because our lemmings propel it into the penny stock sky. Some get even shot through and beyond that sky, meaning they are not anymore penny stocks after the pump inflated them.
The cheaper the stock is, the easier it is to rock its price. Thus one of our trading rules for penny stocks is to leave stocks below 10 cents or so alone. Just ignore them as they are usually hyped.
So, what happens after our private penny stock investor believes all positive things that he got told by the pump promoter?
This nice guy is now unloading his own position or part of it into the buying frenzy! While brokers like to cheat by front running an order, these penny pushers are sort of back pumping their own stock recommendation.
The outcome is that the price retreats and at least not all of our brave investors can get off the sinking ship without taking a loss.
Buying directly into the hyped penny stock alert is not that wise. At least not if you don’t have a plan how to handle this cheating pattern.
There are some options to cope with this con:
Buy early and sell early so that you are on average profiting from the short rise.
Buy before the alert comes trough. That’s the tough one. You must probably be the penny promoter yourself, or at least be affiliated with him.
Sell and short the stock at a much higher price than the one before the promotion began. This one is risky. You never know how high the price will eventually rise. It is also difficult for many small cap stocks to get a broker that allows you to short the stock.
Buy long before the trading alert arrives. This can be done by scanning the penny stock universe for stocks that inexplicably spiked over time to just fall back to their hibernation price level very soon after. Such stocks are likely to be targets of pump and dump promoters. It may happen again and you are in cheap. Basically you are riding their horse but without being guilty of cheating others.
Here is the better option:
Having the right trading alert source. Honesty counts here.
It is enough to have someone or something that produces stock trading alerts not with the intent to just sell into the buying avalanche. Honest stock alerts from someone with the right system is what we are looking for.
In other words, it is not necessary that you have a penny stock prophet with a hit rate of 90% or so. Oh no, even less than 50% may be enough…
Less than 50% and you will make a profit?
Right, and that is because the average gain in the penny stock markets can be extraordinarily high.
Stocks move on a logarithmic scale. A doubling of the price has the same chance than a halving. This math is not completely true, especially with small price stocks, but there is still a tendency for asymmetric up- and down moves.
So, in absolute dollar or cent values a move upwards is usually bigger than a move down. You just have to have the right system…
And that is one that concentrates on stocks that have fallen strongly from their historic highs.
Look at our home page and find out more about the easiest penny stock trading system there is.
Best of all, it is not only easy, it works reasonably well…