Within the past couple of weeks, GameStop stock has done some interesting things. To be more precise, people who bought and sold $GME did some peculiar maneuvering. And while it’s pretty clear what has happened, let’s talk about what it means for day traders and how these events have changed the stock market. 

This blog post is based on my interview with Mike Spinosa that we recorded on the last day of January. Check it out below if you’d like to hear Mike’s opinion and hot takes. He had a lot of insightful and hilarious comments!

The way I see it, this was supposed to be just another short squeeze on a massive scale, a sector trade. GameStop as a business hasn’t been doing very hot for years, and it was only logical that the stock price won’t be doing too well either. However, the sentimental value that people have for the company came into play, as well as some loose money people have recently accumulated.

In the past couple of years, day trading has become much more accessible. Thanks to apps like Robinhood, you can get started with as little as $1 and get charged no commissions, so people are more eager than ever to open a cash account and try out day trading for themselves. On top of that, we have celebrity traders advertising their courses and telling people that anyone can become a day trader. Also, many people are working from home and spend more time on the Internet. Organizing online was just a matter of time. For example, the subreddit r/WallStreetBets has over 9 million members. All these factors have created a perfect storm, resulting in this massive GameStop stock movement.

It’s important to mention that cases like this have happened before, and they might very well happen in the future too. Media involvement made $GME a household name, but other than that, this is nothing new. The stock market gets manipulated all the time, but now regular people found a way to participate in it in an organized way. The road ahead will depend on the regulations or lack thereof that will come out of this event. It’s really amazing to see these events unfold right before our eyes, and this is definitely not business as usual. However, it may very well become just that.

Recently, I’ve been hearing people who had never before expressed any interest in day trading ask all kinds of questions about what’s going on. And while some curiosity from the general public may fizzle down, some people may still get influenced by it very strongly.

I think it’s reasonable to assume that more people may get into day trading just because of how loud this event has been. They’ve seen day traders with tiny accounts and close to zero experience make bank on this trade. From what they’ve learned, they might believe that there is strength in numbers and that they can make money the same way over and over again.

And while there is a certain truth to that, and having more like-minded players on the market can sway it a certain way, there is still so much at play that new day traders may not know just yet. This is why I say that anyone who’s trying to break into day trading has to be extremely careful.

It’s very easy to follow someone’s directions when they say “Hold” or “Sell”. However, that’s not how day trading works. It is a very personal process, and your background, mindset, and beliefs about money play a huge role. Losing sleep (literally, not figuratively) over holding a stock overnight a real thing and following the herd won’t help you battle your personal demons.

The market is more volatile than ever, and we all had to adapt. There is a lot of inexperienced money out there, and too much poor advice is being presented as facts. Anyone on Reddit can pretend to be an expert, and many new traders believe what they read too easily. And while it’s ridiculous to follow advice from random people on the Internet, as a trader you kind of want to be aware of what’s being said in these overgrown chatrooms. This way, at least  you know what to expect. Before this, people were going to SEC for news and updates. Now, you have to check the most popular Reddit threads too.

As a relatively experienced day trader myself, I can’t help but cringe at everything that’s happening. It’s crystal clear that we all need to adapt to the new reality and the new norm of having a Black Swan event before noon, but this is just something we’ll have to wait out.

This whole situation reminds me of weight loss and exercising scams. Yes, you could potentially lose fat and build bodybuilder-style muscle within a month or so. Will you look ripped? Absolutely. Will you have to take steroids and risk ending up in a hospital? Quite possibly, yes. Will you pick up any real skills and habits along the way that will help you make working out a viable career in the long-term? Very unlikely.

So thousands of people made good money on $GME. However, that doesn’t mean that they now know how to trade. Moreover, I believe that many people will disappear after their first big loss. And with no proper plan and risk management, it won’t take too long. And possibly, the market is going to come back to the pre-pandemic volume sooner than later. It’s hard to predict these things, and I wouldn’t want to play Nostradamus. However, I know for sure that anyone who got into day trading to make a quick buck will be gone within the first year.

Additionally, I think that serious traders will have to reevaluate their brokers. Personally, I’ve never used Robinhood for my trading since I’m very happy with my broker. Speed, communication, and professionalism are my priorities when it comes to choosing brokers, and I’m sure that many people feel the same way. Maybe, the whole broker market share will shift to reflect that opinion.

I also think that hedge funds will get their stuff together a bit more. How weird is it that many of them didn’t have any proper risk management in place, and some even had to face a liquidity issue?

And when it comes to any dedicated day traders, I believe that we will learn from this and readjust. After all, learning how to function well outside of your comfort zone has been the main lesson of 2020, and 2021 seems to not be any different.

Risk management is a must. Look at your rules and see if they are still viable. Some criteria will have to be loosened, and some will have to get tightened. For example, I haven’t held a stock I shorted overnight for over a year. If I made that mistake, I would’ve lost my account. The market is crazy right now, which means that you have to triple-check every entry and risk. Two things can mess you up: your size and a Black Swan event. Assume that the event can happen at any moment, and make sure that you and your account can handle it.

Also, remember that you are here for the long haul. Don’t jump into questionable strategies out of FOMO unless you can afford it. The opportunities to make money will always be there. Focus on multiple streams of income (both in the market and other areas) and set your mindset on building wealth as opposed to making quick money.

Next week, I’ll be writing a blog post about trading part-time and full-time. Since I’ve done both, I’m very excited to share my experience. Subscribe to my newsletter, and I’ll see you next week!