3 Reasons why I didn’t buy Gamestop, AMC, or any WSB Reddit stocks

By now you’ve heard all the hubbub about Gamestop, AMC, or other short-squeezed stock phenomenons of late. Perhaps you traded some of these names in the past few weeks and made some huge gains. If that’s you, “good for you!” I say. If I’m honest, I found myself on several days pondering an entry into Gamestop along with all the WallStreetBets Reddit crowd. I would be sitting at my desk about to enter a trade asking myself questions like “Is this the right time to buy?” “At what price do I sell?” “What are the chances I lose all my money?” It was these questions that caused my pause and were ultimately the reason I never entered a trade because I couldn’t answer any of them to my satisfaction.

I am a professional trader. I am the sole provider for a family of seven. Believe me!... I could really use some of those YOLO gains I saw on Reddit to help pay for my son’s college tuition next year or for the $1,100 repair for my car’s electrical system last month. That said, if I lost money on a Gamestop trade, it would really hurt my chances of being profitable for the month and providing for my family. Being a successful trader takes discipline. Sure, being good at trading is important too. But being disciplined, removing emotion, and having a good trading plan is paramount to consistently generating income trading in the stock market.

So here are 3 essential components to a successful trading plan (and the reasons I didn’t buy Gamestop or AMC):

1. Define your strategy - The old adage, “buy low and sell high” is not a strategy. It is much more of a joke than a strategy. The WSB reddit traders all promise their darling stocks are going “to the moon!” If you’re like me, you might be asking yourself, “well what price is that?” Wasn’t the $147.98 closing price on January 26th high enough? Or what about the closing price of $325 on January 29th? Or the intraday high of $483 on January 28th? If you were a shareholder of Gamestop stock at anywhere below $20, or below $40 for that matter, why would you still be holding on to any shares of a company who hasn’t produced any earnings for you as a shareholder but yet provided a 800%+ return? And yet, the Reddit feed is full of traders who are still touting that they are holding on because they “believe” in the stock that much. Well, in the words of Rudy Giuliani, “hope is not a strategy.”

So, as part of the strategy definition in your trading plan, you’ll want to define what the inputs are that you will use not only to enter your trade, but more importantly and often overlooked, what the inputs are you’ll use to exit. What is the technical set-up that will trigger action? What moving averages, events, or other indicators will cause you to risk your hard-earned dollars for a market return? What is my desired return on risk? Will my exit from my position be triggered by a technical set-up, a series of events, or a percentage gain? How can I backtest my strategy to ensure it will be successful the majority of the time?

Here is an example of a good strategy:

I will enter a long position when the 9-day simple moving average crosses above the 20-day simple moving average. I will take ⅓ of the position off when I reach a 3% gain. I will fully exit the position when the 9-day crosses back below the 20-day moving average. I will enter a stop-loss on my position at a 2.5% loss of capital.

2. Manage Risk - The first part of managing risk is to define your risk. In the example strategy above, I attempt to define my risk at 2.5% of capital. However, stop-losses are not a sure thing. They are a helpful tool, but you cannot depend on them. One of the many reasons I favor trading options is because it is much easier to quantify and limit risk of loss. However, if you aren’t educated on how options work, trading the leveraged security could lead to significant losses as well. More important than your stop-loss strategy is defining what your position size will be for your different strategies. Do this before entering any particular position. Unfortunately, there are too many stories of the WSB reddit traders risking way too much seeking the big payday.

So, part of managing risk is also managing your emotions. This is why having your plan in place before you trade is so important. And stick to your plan no matter what. Here is an example of a good risk management:

For any stock position, the maximum position size will not exceed 3% of my account balance. Stop-losses will be set at 2.5% loss of capital. For any options position, the maximum loss of any single position will not exceed 1.5% of my account balance.

3. Manage your plan - Having a trading plan is no good if you create it, put on the proverbial shelf, and never revisit it. Keep a log of your trades. Track as much data as you possibly and reasonably can. Have a daily, weekly, and monthly routine where you look at your trading performance via the data you are collecting to assess your performance and how you are executing your plan. If you don’t trade for a living, you don’t need a daily routine. However, if you are executing more than 1 to 2 trades per week, you should at least have a monthly reflection if not weekly and monthly. If things aren’t working, revise your plan. If things are working, plan to do more of them.

Here is an example of a good routine for trading plan management:

For each trade, I track my entry and exit date, entry and exit price, my probability of profit, max gain and max loss, whether my trade was profitable, and what my profit or loss was. At the end of each day, I log some notes on trades I closed to reflect on my strategy and how my execution could be improved. On a weekly basis, I calculate my win rate, my average win and average loss, and I examine my losses to check for areas for improvement or areas where I deviated from my plan. On a monthly basis, I evaluate my strategies to see if any should be revised or even discontinued, and if any strategies should be emphasized more or expanded.

Being a successful trader is hard. When you make mistakes, you lose money. It makes that much more difficult to recover and make your income goals for the month. I hate losing money. That’s why I have a trading plan, stick to my trading plan, and constantly revisit my plan to make sure it is working for me. If you are a full-time trader, are active in the market or are looking to become more active in the market, or are thinking about becoming a full-time trader, day trader, swing trader, etc, I urge you to make a plan. Do what works. Don’t do what doesn’t work. Gambling on stocks that are going vertical might get you a good return once in a while. However, over the long-run, you might be the one holding stock at a bloated price “hoping” it will go back up so you can exit. You’ll wonder how you allowed yourself to get into this situation where you gambled your retirement on a stock that is one step away from bankruptcy. Successful traders have a repeatable plan that they can execute with a high degree of probability and limited exposure. They have the discipline to walk away from situations that seem tempting but are just too risky. If you want to be a successful trader consistently generating income in today’s market, you need a plan.

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