Unless you’ve been living under a rock, you’ve probably gotten wind of the GameStop rally and crash in the past weeks.
What are the valuable trading lessons we can take away from this #GameStonk madness?
1. Always make room for the unprecedented.
If there’s anything that we’ve learned from 2020, it’s that toilet paper hoarding is a real thing and that one should always be ready for plot twists.
Just when we thought that bitcoin skyrocketing to new all-time highs was the most exciting way to kick off 2021, GameStop stole the show with its dizzying ten-fold surge in a matter of days.
But as FOMO kicked into high gear, Robinhood and several other brokers restricted GameStop trading and hiked margin requirements. As a result, the stock lost three-quarters of its value, plunging from nearly $500 to $120, in less than a couple of hours.
As a retail trader, it can be very humbling to know that there are much bigger players in the game that can turn the tables real quick.
2. When in doubt, stay out.
Short squeeze? Higher margin requirements? What??
It sure is tempting to have a piece of the pie when everyone and his momma seem to be on it, but it doesn’t really make much sense to jump in blindly.
And if your gutfeel tells you that something fishy is going on, you might be better off sitting on the sidelines instead.
And if you absolutely can’t help yourself from participating in unprecedented events, trade tiny! Only get bigger if the trade immediately goes your way, and trail your stops quickly!
3. Don’t trade money you can’t afford to lose.
We just can’t stress the importance of proper risk management enough!
Hedge funds that were short GME weren’t the only ones that lost big time to the GameStop mania. Several retail investors, especially those who were late to the game but still bet the farm, actually lost their life savings trying to chase the gains.
Losses will always be part of trading. Even if you’ve done all the proper research and analysis, the market can have a surprise up its sleeve (see number 1) that might spur some whipsaw action.