SCOTT WELSH TRADING BLOG

The Good News and Terrible News on the GameStop Saga

The Good News and Terrible News on the GameStop Saga

Feb. 10, 2021

What a story.

Millions were on the line. Fatcats were finally being taken down by regular people.

Main Street traders unite!

Well…

The dust has started settling and the story may not be all it was cracked up to be.

While it was portrayed as a heartwarming story of regular people forcing arrogant hedge fund managers into profitable submission, the real story is not so great.

The data shows that the growth of GME was fueled by institutional investors, not retail traders.

Reports say that retail traders were actually net-short on GME. What does that mean?

It means the rise in GME was good for institutions and very bad for retail traders. GameStop was only #15 on the retail buying list in January.

Institutions made millions. Many retail traders did not. 

Take that, retail traders? 

Yikes.

The data shows that the “revolution” was a fatcat fund-raiser.

That’s the bad news.

Here’s the good news.

All regular traders have to do to improve their financial lives is:

Use a trading system.

Don’t trade on Reddit. Don’t listen to the hot news. And don’t trade anything without a trading system.

Ever.

It’s heartbreaking to hear about retail traders who are still in GME after buying in triple digits, hoping their message board buddies are right about it going back up to $500.

Hope and message boards are a recipe for disaster.

But here’s a simple alternative. Find a hot stock and trade it with a breakout system.

GME wasn’t hard to find. It was a recommendation by Big Short star Michael Burry back in 2019. He made over $200 million on it, by the way.

If somehow you found GME, here’s what a regular person could do.

You could use a simple 40in20out system. If price breaks the high of the past 40 days, you enter. If breaks goes below the low of the past 20 days, you exit.

If you had copied the idea of Mr. Burry and put this system on GME in early 2020, here’s what would’ve happened.

You would’ve entered in March 2020 and had a loser. You would’ve entered in April and had a loser.

But you would’ve entered in August at $4.88.

According to the system, you’d still hypothetically be in — and you’d still be hugely profitable.

But parabolic stocks are a completely different animal. Once a stock goes parabolic (huge up bars on incredible volume), then an easy, systematic way to exit would be to move the trailing stop to 5 bars back.

If you starting with 40in20out and moved to a trailing stop of 5 bars back when things got crazy, here’s the end result:

That’s an outlandish winning trade. The entry originally was a $4.88. The switch to a 5-day exit was made after the stock went crazy on Jan. 26, 2021.

And the exit would’ve been at $80.19. That’s over 1,500%.

Yes, this hypothetical systematic trade could’ve been more profitable. It went to $400, after all. But a systematic exit would rid a trader of any worry and allowed him/her to exit with a massive win and no emotion.

That’s just one very basic example.

But keep this in mind.

Trading a simple system like this produces hypothetical profit on many things.

Using that system, here’s AAPL’s hypothetical performance from 2010-now trading $10k of stock each time: https://www.screencast.com/t/xGpLxcv0r

Here’s the same for AMZN: https://www.screencast.com/t/f91yJeLNqB

Here’s the same for TSLA: https://www.screencast.com/t/aPYGpNH2nRaf. (And TSLA would currently be in a position that’s up almost 100% as I write this.)

If we used a simple system on those trending stocks and made a move to a 5-bar trailing stock on GME, we’d hypothetically be doing very well.

Without the stress.

A trading system keeps us away from emotional decisions and still gives us a chance at big profits.

We don’t need to take down Wall Street.

We need to make money for us and for our families.

We need happy endings.

Talk to you soon.

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.