How To Start Investing In Stocks Reddit – There’s no denying that 2020 was the year of the millennial trader who made astronomical gains on Tesla ($TSLA +700% year on year), GameStop ($GME +600% year on year) and other high volatility stocks. These YOLO (You Only Live Once) traders put all their savings on risky bets and coordinated their purchases with 1.8 million followers on Reddit r/WallStreetBets and other social media sites.
While it’s traditionally known that retail investors don’t stand a chance against Wall Street institutions, a combination of bravado and synchronized social media buying has leveled the playing field for millennial traders, and Wall Street is paying attention.
How To Start Investing In Stocks Reddit
In this article, we’ll take a step-by-step approach to using WallStreetBets to spot and profit from breakout stocks. I will give a real life example of how I bought GameStop (NASDAQ: GME) to make an 8-15% profit on a swing trade. While this approach won’t give you a 500% return like on WallStreetBets, it will give you a method to profit from the market with controlled risk.
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The first step is to identify the breakout stock you want to buy. When viewing stocks on WallStreetBets, you need to separate the signal from the noise, as many of them are false positives and do not lead to profitable results. To identify a real breakthrough candidate, look for posts with the following characteristics:
In my example, I looked at WallStreetBets and narrowed down the potential targets to GameStop and Palantir. I eventually decided to continue with GameStop as it had over 30 popular posts, 10 of which had over 8,000 upvotes. Unlike Palantir, interest in GameStop remained consistently high and dominated much of the community discussion during the breakout period.
Troubled stocks with elevated levels of short sellers have the potential for a short squeeze or action by short sellers buying back shares to cover their losses. During a short squeeze, prices rise rapidly and buybacks push the price up even more, causing an even bigger short squeeze. This virtuous cycle is one of the keys to breakthrough. To identify candidates for a short squeeze, look for stocks with a high short percentage (percentage of shares traded that are sold short) and a high short ratio (average number of days to close a short stock).
At the time of purchase, GameStop had a short circulation of 138%, indicating unusual short interest (by comparison, even stocks with a short float of 20-30% are considered high). In addition, a short ratio of approximately 6 days meant that it would take more than a full trading week to close short positions. Gamestop was the perfect candidate for a short hug.
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Every breakout trade starts with a news catalyst to start the move. News catalysts can come in many forms: positive earnings reports, potential partnerships, new product announcements, updated legislation, etc. to name a few. However, like the posts on WallStreetBets, news catalysts can vary in quality. Look for news that is picked up by multiple financial institutions, spread across multiple channels (social media, web, email, etc.) and spans multiple days.
GameStop shares rise as short sellers take a hit Short sellers have just come under pressure. Shares of the video game retailer rose nearly 94% on Wednesday, though… www.barrons.com
GameStop shares are rising and social media traders are claiming victory. Individual investors who recently bought GameStop Corp. walked this week’s winning lap after stocks… www.wsj.com
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For GameStop, the catalyst was the arrival of new board members who changed the company’s online strategy. This story was blown out of proportion by all major financial media outlets, and the news story spread over several days.
Now that you’ve identified your target stock, the next step is to determine your entry time. While there are many methods and technical indicators for doing this, price action is a simple yet effective way to find optimal entry levels for your breakout stocks.
The most important price action analysis is establishing support and resistance for your stock. Simply put, support and resistance are the levels at which the price reverses the direction it came from. For example, stocks that are falling in price will begin to attract more buyers and reach a point where the price stops falling and turns up. This price level is called support. Conversely, stocks that rise in price will attract more sellers until the price stops rising and turns to the downside. This price level is called resistance. By understanding where support lies, you can be more confident that you are buying a stock at the bottom of the price range.
To confirm whether a price level is a strong support or resistance, look for multiple occurrences of these price levels overlapping. In addition, large trading volumes at price levels give you additional confidence that support or resistance will be maintained.
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As the price fluctuates between support and resistance, there comes a time when the stock can break through the resistance and trade in a higher price range. When this happens, previous resistance can act as new support (this phenomenon can also occur on the downside when previous support becomes resistance). If a stock breaks a price level, look for possible entry points at previous resistance.
Looking at the 5 minute GameStop chart, you can see the price action during the 3 day breakout period. For starters, I noticed that $34 was the first point of resistance as it was tested four times that day. On the second day, the stock blundered due to pre-market resistance and dropped to $38. At the open, the price dropped to $34, confirming that previous resistance had turned into new support. With numerous confirmations of support and resistance, I decided to enter a trade on the third day, allowing the price to fall from the breakout highs and buy at the $34 support level.
Knowing the right time to sell is often more difficult than timing a listing. While it is difficult to time the sell correctly, your breakout stock will eventually dry up as existing buyers take profits and new short sellers pile on your overvalued stock. Here are a few tips to help you take profits more consistently.
Similar to using support to time an entry, you can use resistance to time an exit. Set a limit order to sell a portion of your holdings at each resistance level. The amount you sell at each price point is determined by the risk you are willing to take on the trade.
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Stopwatches are a great way to limit your risk while capturing the potential for further growth. Fall timers can be activated to sell your stock only when the price falls below the stop price. By setting stopwatches near support or resistance levels, you can let a stock move higher, but sell it quickly if it changes direction.
Since I entered the trade on the third day after the breakout, I was inclined to sell on the earlier side as the rally may be coming to an end. I set limit orders at $38 and $43 as these were clear resistance levels from the previous days. I initiated the sale of 75% of my holding at $38 and set a sell limit order at $43 for the remaining position. At the time of this writing, the $43 limit order has not yet been activated and I can amend this order accordingly. However, if the breakout is nearing completion, I placed a stop loss at $34 so I could break even on the remaining shares.
Here is the final result. In the worst case scenario, the trade will return 8.6%, but there is potential for a 15.2% return if the breakout continues. This is not a YOLO deal, but we are happy to make a decent profit in a short time.
As always, I’d love to hear how you’re doing with your trades. Please leave a comment or question in the comment section below and I will reply to you as soon as possible. Steve Rogers By: Steve Rogers All Articles → Steve Rogers has been a professional writer and editor for over 30 years, specializing in personal finance, investing, and the impact of political trends on financial markets and personal finance. Follow:
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Investors know Reddit well. The free message center gained worldwide notoriety after Reddit discussion groups launched a coordinated short attack against hedge funds shorting popular companies like GameStop and AMC. “Memshares” were effectively invented on Reddit.
The company filed a confidential draft filing with the SEC in December 2021 and was scheduled to go public in early 2022. The IPO has been delayed due to poor market conditions in 2022 and is still pending.
On February 15, 2023 Markets Insider reported about it.
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