3 Lessons Learned From The Gamestop Trading Saga

3 Lessons Learned From The Gamestop Trading Saga

3 Lessons Learned From The Gamestop Trading Saga 1024 576 Steven Dux

If there’s one trade that’s made the news more than any other of late, it is GameStop.

It shouldn’t be all that surprising. In the last few years, the landscape of trading has changed, thanks to social media, and it’s something that’s evolving all the time!

This can lead to some strange events…

Today, we’ll discuss one of these events and the lessons we can learn from it. 

Just a couple of months ago, a somewhat strange story broke on the stock market. 

If you opened absolutely any news item in the last few months (or spent some time on the trading side of Twitter) you probably heard about the GameStop ($GME) shares going through the roof. 

As we all know, generally speaking, a high demand pushes up the price. Traditional trading happens when we capitalize on that price hike after we have purchased those shares at the earlier low price. So you can make a profit. 

But there’s another way and that’s shorting

Shorting is when you hope the price goes down instead of up. 

To capitalize on this, traders borrow stocks from the market, sell them at a higher price, and then buy them back when the price goes down. 

They then pocket the difference and earn a profit. 

This difference in prices doesn’t even have to be huge. Sometimes it’s minuscule and this is what Hedge Funds specialize in. They short on a large scale, making great profits. 

They make profits from even small drops in prices. 

By selling large volumes of the shares at once, they push the price down, which benefits them. 

If somehow the price doesn’t go down after they have sold the shares (and instead goes up), they still have to return them. And in order to return them, they are forced to buy them back at a higher price. 

This is completely the opposite of what they were originally planning.

And that’s what happened with GameStop. 

Their plan failed, but to understand why we need to back up a little…

What Is GameStop?

GameStop is a US-based high street store that retails games, consoles, and similar devices. 

It saw huge popularity in the 2000s and they opened thousands of stores around the world. In fact, their stocks had more than doubled in 2007. 

However, with the advent of the internet, their sales started going down as gamers started making their purchases online.

GameStop began to struggle!

It’s one of the companies that weren’t doing so well lately, thanks to the pandemic. It is amongst the many retailers hit by the situation, with its stock valued at a modest $3.25 per stock just a year ago. 

Despite this history of decline, stocks of the company went up 1600% in January 2021. 

The company wasn’t doing well but its stocks certainly were!

There was a huge disconnect…

For years, the company’s stock was on the decline and therefore was a favorite of short-sellers, who make money when stocks decline. 

Traders were not concerned with how the company was doing as long as the stock price showed progress. And so, in recent months, GameStop stocks have become the most talked about topic in the industry… 

But what led to this?

What Made The Stock Price of GameStop Go Up 

GameStop stocks were a target of short-sellers for a long time.

Hedge Funds considered GameStop to be overvalued, and they began shorting its stock; which is to say, they borrowed the stock in order to sell it with the assumption that its price would fall, at which point they would buy the stock and lure in some good profits. 

And so Hedge Funds were shorting the company’s shares. 

In fact, the company was the second-most-shorted firm out of more than 6,000 companies listed in the New York Stock Exchange and Nasdaq. 

Meanwhile, noticing this shorting activity, users of the Reddit group WallStreetBets formed a plan to buy and hold GameStop stock as a means to push the stock price higher. 

This is where it all started. 

But then, this rise in GME stock prices took a life of its own…

Word soon spread all over social media and everyone started buying GME stock.

This pushed the demand higher and higher. 

Many were of the opinion that they would like to see Hedge Funds lose and so they simply purchased $GME as a gamble…

While others simply followed the herd. 

And as they had planned, GameStop prices soared. 

Hedge Funds realized they had to try to buy back the shares to cut their losses, which further raised the price. 

So basically, over the course of several months, these investors chalked out a detailed plan to buy GameStop’s stock and push up the price, targeting the hedge funds and compelling them to cover their position by buying back shares, which would push up the stock’s price even more.

At one point in January, GameStop was the most traded equity in the world, with $20 billion of trading volume every day. And of course, retail traders made money.

But the Hedge Funds suffered some huge losses.

After all, shorting a stock is betting against a stock’s future performance. 

Hedge Funds were betting against GameStop.

When short sellers are compelled to cover their positions or buy more stocks to lessen their losses, it is known as a short squeeze.

On the 29th of January 2021, information from fintech company S3 Partners showed that short-selling hedge funds had incurred a year-to-date market-to-market loss in GameStop of $19.75 billion. 

Ultimately, retail brokerages restricted trading in GameStop. Robinhood and Interactive Brokers announced that in some cases, investors would be able to sell only their positions and not open new ones. 

After this announcement, shares of GameStop reversed their gains.

Of course, this gave rise to allegations that the brokerages were protecting the rich billionaire hedge-fund managers over the small investors.

In a nutshell, this has been a tumultuous and interesting situation to observe. 

And because social media plays such a huge part of our lives, I’m sure this will not be the last time such a situation happens — which is an opportunity for you in the future…

Lessons To Learn From The GameStop Saga

In February this year, I also traded the GameStop stock.

It was really significant as it helped me earn $500,000! 

In fact, I ended up making over $2 million with the GME stock.

The strategy I used was bound short. 

I shorted this stock at $150 and covered it at $100. 

Highlights:

  • Trade Dates: February 25, 2021
  • Shorted at: $150
  • Covered at $100 
  • Gain: 50% 
  • Earned: $500K

Not only did I make money from this situation, but I also learned a lot of lessons. GameStop’s wild saga is set to continue because people will carry on hyping the stock. 

And there will be other stocks just like it!

This brings opportunities to those that know where to look, so here are a few lessons I’ve personally taken from this and that you too can benefit from:

1: Do Not Treat Day Trading as Gambling

Day trading is not gambling. 

It is a technique based on logic and mathematical calculations. 

There is no element of chance here. 

Unfortunately, a lot of traders and firms today have started treating the world of trading like a casino. Do not fall for it.

Investing is a long-term process so don’t invest your money like you would at a casino. 

Because this is not a once-in-a-while joyride. This is a career you’re building for a lifetime. 

Treat it like one. 

You may win or lose on such bets once in a while, but what matters more is your long-term financial independence.

This is your hard-earned money that you invest to build a better future, financial freedom, and good quality of life. This investment can one day build you a home, send your children to college or help you travel the world. 

Don’t be reckless with it. 

Know the patterns you’re supposed to focus on and keep your energies there. 

2: Focus on Risk Management

Taking a cue from the previous point, in order to not be reckless with your money, you need to follow proper risk management practices. 

Without risk management the chances of losses getting out of control are high. 

Events like the GameStop saga are a blip on the radar and you as a trader need to look at the bigger picture.

Hedge Funds will recover from events like these but many individual traders won’t. 

Many small investors–the ones on the Reddit forum–took this as an opportunity to target Hedge Funds to make them lose money. And it did work for a bit, gave everyone a few laughs, and a chance to make memes.

But those big hedge funds will (and many already have) recover.

In the long term, they won’t lose… whereas you could lose a lot!

So whenever something like this happens in the future, do not get deviated.

Stay focused on your own risk management and strategies.

You need to customize your risk management plan around your trading style and abilities. 

Remember to determine how much risk you are comfortable with. Proper risk management ensures you keep your losses to a minimum and don’t spiral out of control

3: Have A Backup Account

Even if you try to keep yourself away from scenarios like the Gamestop saga, when something like this happens, there’s so much buzz on social media that you might succumb from time to time. Your fellow traders will talk about it so of course you’ll be tempted. 

Giving in to your FOMO, you will occasionally indulge in such scenes. 

Fear of missing out is one of the most common mistakes every single trader makes. 

When this happens to you, it can be detrimental. 

You will end up trading blindly without enough research.

Patience is key for making money long-term in trading and there’s no room for FOMO.

But, we’re all human and we all make mistakes.

So if this does happen and you do wander off course, have a plan!

To avoid blowing up your account in such cases, keep a portion of your account money aside. 

For example, if you have grown your account from $25,000 to $50,000, withdraw 50% and keep it in a backup account.  If you have a backup account you can still survive as a trader despite multiple losses in a row.

Your Next Steps…

Hype like this will happen again. GameStop isn’t the first and it won’t be the last.

It’s important to be prepared for this, not only so you don’t miss out on potentially large profits, but also so you don’t get caught up in the chaos (and lose all your savings).

Even though day trading is based on mathematics and human psychology, many people look at stock trading as some mythical concept.

Especially when something like the GameStop saga happens. Beginners read about a phenomenon like this and either get overwhelmed or get too excited to jump right into trading. 

Neither are good.

It is important to take a breath before you start trading. 

Get yourself ready for trading in every possible way.

I believe that if you know what you’re doing, focus on knowledge and have the right mentor, you will be able to go about your day trading career in a way that becomes significant for your family’s future.

Be sure to check out the previous articles in this Investing for Beginners series and combine them with this knowledge to get a better understanding of trading. 

In addition, there are a few other steps you can take today:

  1. Subscribe To My Youtube Channel: This is where I share practical training on how to trade, as well as behind-the-scenes insights into the trades I make.
  1. Join My Newsletter: I write these emails for people who want to learn the basics of Day Trading and the practical steps they should take to get started.
  1. Join The Freedom Challenge: This is my flagship program for traders who want to level up and learn about the techniques I use, how to use them, and what to do to turn Day Trading into their primary income stream. 

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