How Does Operators and Scamsters Trick Retail Investor?

Namaste to all #Hive and #Leo finance community members. 🙏

Financial markets are ever-changing and dynamic. And market participants are always looking for opportunities to make profits. However, not every participant trades ethically by the rules, and some use unethical and illegal tactics to manipulate different digital assets. This is known as manipulation, and that manipulation can also happen in #Stocks, #Crypto, and #Forex markets.

In today's blog, we will dive deep into operators and scamsters tricks they use to manipulate retail investors like you and me.

Image by Freepik | Edited on canva

What is manipulation in financial markets?
The idea of making money by investing/trading is simple: You buy at a low price and sell at a higher price or at the time of shorting, you first sell at a higher price and later buy at a lower price and settle your trades. For which you analyze the company's profit and loss statements, crypto's white paper, news and development, price action, big bulk deals, and different indicators, Etc.
Now the manipulators deliberately attempt to influence the price of a particular stock or a particular crypto for personal gain by knowingly spreading false or misleading information and engaging in illegal trading to trap the retail investors. The goal of this manipulation is to create a false perception of demand and supply, causing prices to rise or fall sharply.

Let us now delve deeper into the tricks used to trap the retail investor.

1. Pump and Dump: Pump and dump is a classic stock/crypto manipulation tactic where manipulators continuously buy a large number of shares and then create false hype by spreading news and rumors around it to boost the prices. This then creates an artificial demand and greed, which leads to a rise in prices. Once the price reaches a certain level, the manipulators then sell their shares at a profit and exit, resulting in a sharp fall in prices and leaving other investors with losses.
These schemes are typically carried out by groups of individuals, known as 'pumpers' who work together to create a bustle around a particular stock or crypto. They may use social media, online forums, email newsletters, SMS, WhatsApp, etc. to spread rumors about certain stocks or cryptos mainly where liquidity and market cap are low.

2. Short Selling/Short and Distort: Short and distort is the exact opposite of pump and dump, In which manipulators take short positions and then spread bad negative news and rumors about a stock to create an artificial supply and fear in the mindscape of retail investors, which then leads to a significant fall in prices, and when the price falls, manipulators buy back the shares to cover their short positions at huge profits, causing the price to rise again, and leaving others with losses.
This scheme is typically run by big institutional investors who have the resources and huge funds to take significant short positions. They may work with journalists and big media houses to spread rumors about the company's business, their abilities, profit and loss statements, any scam, etc.
Short selling in the Adani group of shares is the latest classic example of short and distort scheme.

3. Wash Trading: Wash trading is when an operator buys and sells the same security to create a fake impression of trading activity. The aim is to manipulate the stock or crypto by boosting volume and prices to trick retail investors into buying. And it is not easy to avoid it either because volume and price are 2 key indicators in technical analysis and most of the day trading is done on the basis of these 2 indicators. Therefore, most traders suffer losses when scamsters manipulate them.

4. Spoofing: Spoofing refers to a manipulative trading practice where scamsters place big orders to buy or sell a stock with the intention of canceling the order just before its execution. The purpose of spoofing is to create a false impression of huge supply and demand in the mindscape of retail investors. There are many traders who make their daily trading decisions on the basis of the "Depth of Market" (DOB) indicator. They read the market depth as a signal of the likely direction of a stock price. So they place their orders accordingly. The scamsters then cancel their order and sell their stock at a higher price to make a profit.
For example, a scamster might place a large order to buy a stock and create the appearance of high demand for the stock which can be seen in the depth of market indicator. Now the retail traders may be influenced by this demand and start buying the stock, causing the price to rise. The scamster can then cancel their buy order and sell the stock they already owned at a higher price.

5. Insider Trading: Insider trading is when someone with access to non-public inside information about a company uses it to buy or sell its stock.
For example, if an executive of a company or a manager of a bank knows that the company/bank will announce good earnings or a major loss in the near future and he buys or sells a large number of shares just before the public announcement and makes profits. This act is considered insider trading, which is illegal and can lead to heavy fines and in some cases even jail time.

Above are the most favorite tricks of operators to trap retail investors. With the knowledge of what market manipulation is and how operators can trick and trap the retail investor, You can better analyze your trades and ensure that you are not being manipulated by any market manipulator. Although It's quite challenging to spot them due to the complex tactics used by the operators. But here I would like to share with you everything I have learned in my trading journey so far including ways to spot, avoid, and overcome such traps, but we will talk about that in detail next week.

Till then trade carefully, and keep learning, earning, and smiling!

Posted Using LeoFinance Alpha