Posted by strudy on Aug 29th, 2008

All too often we jump in and suddenly find ourselves out of our depth.

The stock we have just bought because it was going upwards in price quite nicely. And of course we did not want to miss out did we? So we dived in as quickly as we could.

It has now suddenly stopped, gone downwards, whizzed past our stop loss (you did have one didn’t you?) and has now dropped to at least 15- 20% lower than what we paid for it in the first place.

And this has happened all in one day’s trading. So there you are bedazzled and bewildered and wondering what the hell has gone wrong?

More than likely you have been the victim, and have just been unfortunately snared up in a classic” Pump and Dump.”

I shall now inform you as to what has happened. So you won’t get caught again next time. (Hopefully)

Normally it is a stock that is in a very slow uptrend, with little bits of good news here and there in the media.

This is just enough to keep a bit of volume going, but hasn’t been enough to fully attract the notice of the share market.

Behind the scenes usually over a week or two, sometimes longer, one or two traders are busy buying up all the loose stock that is available. Usually at the lowest prices possible.

Once the stock becomes harder to accumulate, they will offer a little higher buying price just to keep the pot boiling quite nicely, still soaking up all the available stock.

And when they have accumulated enough stock for their purpose the game is on .

A  much bigger buy order will go in (but not to large) offering higher prices.

Sometimes this happens just before a pending news announcement is going to be made.

This of course forces the price upwards dramatically, which of course the market notices immediately.

This is exactly what these traders have been waiting for.

Because there is now a scarcity of stock available, share prices will begin to start climbing steadily upwards.

This is when traders begin to unload their stock at a trickle, then more again as more uniformed buyers (dare I say suckers) compete against each other to buy the stock at inflated prices.

All because they are frightened of missing out on the run to make huge profits.

At this stage all of the traders available leftover stocks are hitting the market at once which has the effect now of stalling the rise upwards.

Now once this happens, the New Traders seeing the share price start to slide backwards, they hang on hoping it is just a temporary adjustment in the stock before it continues upwards again.

Or else they become panic stricken and start to sell their stock, so as not to lose too much money, which of course has the effect of forcing the price downwards further still.

Sometimes to a lower level than which it first started at.

Now I bet you are wondering where the original traders are now?

They have gone, they have sold all of their stock at 100% profit if not more, usually just as the share price started to drop downwards.

And have now begun quietly buying back that same stock at bargain basement prices. Preparing themselves to do it all again at a later date.

How do I know this??

Because I have found out the hard way, not just once but twice. So I am talking from bitter experience.

And be careful, it hasn’t stopped yet, because it is still going on in today’s stock market in one form or another.

One classic place to find these traders in action is in a chat room where they are busy “ramping” a particular stock or giving out red hot tips.

Some tips are of course genuine, but remember”Always Do Your Own Research.”

If things look too good to be true or you are suspicious, ignore that tip.

It could save you money and heartaches.

Editor’s Note:
Strudy is a keen successful share trader on the Australian Stock Market Visit his weblogs

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