If you are an active retail CFD trader, the whole saga of meme stocks shouldn’t be a surprise. There is record-breaking speculation on stocks like Gamestop, AMC, Blackberry, Bed Bath & Beyond, or Naked Brand, assets that had been heavily shorted by multiple hedge funds. Even though many beginners had been drawn into this mania by the massive intraday gains, we believe it would be wise to consider multiple aspects that might have a significant impact on your trading account.
These market conditions won’t last forever
In terms of Q4 2020 earnings, the numbers had thus far been better than expected. Almost all blue-chip companies reported above-estimates figures and at first glance, it should have been a positive catalyzer for stocks. However, that had not been the case and all major US indices ended the week with losses.
Some experts believe hedge funds and companies that had to take massive losses on meme stocks were also forced to liquidate some of their holdings on the winning stocks. We don’t expect to see these small-cap beaten stocks to continue to outperform by a large, especially since it would be increasingly difficult for retail traders to place large trades.
Regulators and brokerages can intervene
Robinhood already announced that it limits the amount its customers can buy on Gamstop and other meme stocks, aiming to clamp down on the speculatory frenzy. The SEC also released and press release stating it will analyze the massive outperformance of these stocks.
This is another reason why it would be appropriate for those late at the party to stay away from these assets since regulators and brokerages can be a game-changer. At the same time, in case you want to be a professional trader, the first thing to have in mind is risk, and only then the potential reward.
Sharp price moves + leverage = high potential for loss
When these stocks are moving up aggressively, market participants are no longer thinking about overshooting inflation or other fundamentals. Their main focus in the price and in chasing the market higher, they use high leverage. Also, we need to consider that most of the traders on Robinhood are using out of the money call options and leverage their exposure, which further increases the risks in case the market takes a turn on the downside.
All the high returns posted on an intra-day basis are very tempting and many beginners had jumped in. However, in the longer run, this isn’t the right approach for someone wanting to make a living out of online trading.