I was so busy with my other job which makes me barely able to write again but rest assured I will try to continue contributing to Forex Jed as this is currently my personal blog which covers the topic that I am passionate about, that is, regarding the financial market, especially the forex market. In this article, we will delve more into the pump and dump which is some tacit manipulation by big players in the market typically small and mid-market which has low volume and illiquid.
Pump And Dump In Trading
As we all know that in the financial market there are many participants from the individual to the institutional. Those are the ones that move the market. Pump and Dump in trading are exclusive concepts in which those two concepts are closely related to the participants as the definition of the pump and dump from Dhir (2022) is the act of manipulation to boost the price of a specific stock where the target is usually the small and mid-cap stocks by recommendation. The recommendation is certainly such as fake information and rumors which can play the psychology of the beginners in trading into believing that the recommendation is true and so they act based on that "information".
Schemes
The schemes of pump and dump are honestly easy. Their targets are flocks of birds (beginners) that gather together waiting for "easy and fast money" that they are willing to take "instructions" from the so-called "professionals". The illustration is like when you see the image of this post where one professional person that is usually work in a group shares fake information that the price of pigs is going to go up and the new farmer of pigs is willing to take the information without filtering it first, thus, sharing that information to the new fellow pig farmers. Later, the price of pigs is high and the person and his/her group are ready to sell the pigs in a massive amount so they can gain a big chunk of money which eventually leads the price of pigs to go down and then make the new farmers loss as the price of pigs went down that they cannot sell in high. This is what it is called pump the price and dump the price.
Can It Happen In Forex?
Even though it can happen if all the big players in forex work together to move in the specific direction of the market. Unfortunately, in forex, the pump and dump schemes are unlikely to happen as the daily transaction is high that it can reach up to trillion dollars which makes it hard to manipulate. However, if we talk about the stock market and cryptocurrency market, then the pump and dump can happen as the daily transaction still has low volume on it. For example, the price of Bitcoin from October 2020 to April 2021 wherein the chart the Bitcoin price goes up suddenly from around $10.000 to around $60.000 which is five-fold of the original investment if people invested at the price of $10.000. However, later the price drops down to around $30.000 in July 2021.
Conclusion
The pump and dump scheme is like when you are a farmer of pigs and someone (usually belonging to a group) told you that the price of pigs is going to go up and the person who told you has an ulterior motive behind it which is selling its massive amount of pigs when the price of pigs goes up significantly. So, when the price has gone up the pump and dump group will then sell its massive amount of pigs to make a big chunk of money but makes you not able to sell your pigs as the price drops down significantly and you have to wait for the price to go up to sell it.
Written by Andre I.
Reference
Dhir, Rajeev. 2022. Pump and Dump. Retrieved from Investopedia (Accessed 30 April 2022): https://www.investopedia.com/terms/p/pumpanddump.asp