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What You Can Learn From the Insane GameStop Short Squeeze

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Written by Timothy Sykes
Updated 1/31/2023 10 min read

I’ve seen a lot of crazy stocks in my day, but nothing quite like GameStop (NYSE: GME).

Could this be a big shift of power in the markets? Only time will tell.

If the short squeeze on GME is an omen of what’s to come, we could see a huge transition from large institutions to young day traders at home. No matter what happens, what we’re seeing in this market is historic, so take the time to learn from it.

We’ve had MANY supernovas since early 2020 … maybe the most I’ve ever seen. But GME is on a completely different level. It rose from the ashes and said, “hold my beer.”

If you’re an active day trader, no doubt you know about its crazy run. On January 11, the price was around $20 per share. As of January 26 at around 5 p.m. Eastern, the stock hit $240 per share. This morning, it went on another tear.

Let’s put this into context … Just a year ago, GameStop was struggling. Now, it’s squeezed entire hedge funds and made thousand percent gains from $20. How the heck does this happen? Let’s get into what drove this run.

GameStop’s Calm Before the Storm

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In March 2020, GameStop was in the gutter. Lockdowns crippled many businesses, and in-store sales were plummeting.

Analysts were trashing GME. People were ditching shares at $5, $4, and even $3. It felt like it could be the next BlockBuster. But some saw this chaos as an opportunity.

Throughout the second quarter of 2020, in-store sales kept diving. But there was a silver lining. In the same quarter, GameStop (NASDAQ: GME) had an 800% increase in e-commerce sales.

Then came a massive catalyst.

In October 2020, GME announced a strategic partnership with Microsoft (NASDAQ: MSFT). A lot of people didn’t believe the company could be saved. Big hedge funds made huge bets the stock would ultimately fail. But the MSFT deal gave GameStop the punching power it needed to punish shorts.

Then there’s the sub-Reddit page r/WallStreetBets for traders both new and experienced. (Update: It’s reportedly since been banned on claims of hate speech.) Some analysts think this page is responsible for creating the GME short squeeze movement.

For months traders and investors have been scooping up GameStop stock. But who could have guessed this network of amateurs could push a $7 billion hedge fund like Melvin Capital to its limits? Check out what StocksToTrade’s Tim Bohen had to say about it…

GameStop isn’t some illiquid OTC stock. It’s a legit company. You can’t just round up your buddies and take it over. It can cost millions of dollars to create momentum on a listed stock. But it looks like Reddit traders made it happen.

So what fueled the GME short squeeze?

Don’t Underestimate This Market

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Earlier this week, momentum started to build on Reddit. More and more people started adding to the push. As of January 26, there were over 80,000 comments on The $GME Thread and a potential army of buyers for GameStop stock.

This move seems different from other chat room pumps. There’s some evidence that buyers are targeting shorts. With enough pressure, this can create a massive short squeeze.

Then, of course, there was that tweet from Elon Musk. That seemed to only further fan the flames.

Talk about wild volatility! It can be intimidating, but you can learn to navigate volatility and trade safely. Start with my no-cost “Volatility Survival Guide.”

The Battle of the Billionaires

As of January 23, Melvin Capital lost roughly 30% of its $12.5 billion in assets. A significant portion is from squeezes like GME. But it fought as long as it could.

Ken Griffin (Citadel LLC) and Steven A. Cohen (Point72 Asset Management) are some of the biggest names on Wall Street. When they throw their weight around, a lot of people pay attention.

On January 25, they injected roughly $2.75 billion into Melvin Capital to potentially help stabilize a short position on GME. But with GameStop hitting $240 a day later and going even higher after that, that plan seems to have backfired.

gme chart during short squeeze
GME chart, 5-day, 1-minute candles — courtesy of StocksToTrade.com

Even stock analyst and TV talking head Jim Cramer was blown away. At one point in a recent Halftime Report, he mentioned how he’d react if someone said, “GameStop is going to $250.”

Then a day later, it hit $240. As of midday trading on January 27, the stock’s well over $300.

The Big Lesson From the GME Short Squeeze

This is a near-perfect example of why I hate shorting. For one, you have no idea in this market how far stocks like this can run. And you’re always on the hook with your broker. Remember, you don’t own the shares … you’re borrowing them. If you can’t cover, you could be screwed.

Think of it this way … If a giant hedge fund can get squeezed, so can you.

These hedge fund billionaires are feeling the pressure. Covering a large short position during this madness is often hard. And in this case, there are seemingly endless buyers. When a perfect storm like this happens, the price is bound to go up.

Just look at that chart.

This is why I prefer to trade long in this kind of market. Check out some of my top trading patterns in my FREE guide to penny stocks.

Now for the question so many are dying to ask…

Is There Still Time to Trade GameStop?

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Squeezes like this can grab attention. In hindsight, it all looks easy, right? Just find a runner like GME and ride the wave to big gains.

That’s the problem. Too many traders want fast, ‘easy’ gains. They don’t want to do the years of work that top traders like Jack Kellogg or Matthew Monaco put in.

So should you trade GameStop? Nope. It’s too late now. If you chase, you’re asking for trouble.

There’s no telling what could happen next. But one thing is for sure … this isn’t a pattern. There’s no precedent for this, which means there’s no history you can study to prepare for GME’s moves.

If you want to become a self-sufficient trader, steer clear of this type of action. Situations like this separate disciplined traders from the majority of traders who fail to prepare and ultimately lose.

Stick to your trading plan. Never break your rules — no exceptions!

Apply to My Trading Challenge

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And I only accept hard workers, so you must apply.

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And you’ll be a part of the Challenge chat room where you can network with other traders and study different strategies. I know trading is hard, but you don’t have to go it alone.

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In 2020, I passed $6 million in profits using just a handful of day trading strategies.* And I’m proud to have taught seven traders in the Challenge who’ve hit millionaire status.* In the Challenge, you have the opportunity to learn from them and how they became self-sufficient.

I’m amazed at this community every day, and you can be too. Apply today and make a real commitment to your trading journey!

(*These results are not typical. Individual results will vary. Most traders lose money. These top traders and I have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose.)

The GameStop Conclusion

Every once in a while, we see a stock make insane moves like GME. Some traders refer to these as black swans.

But we haven’t seen many like GameStop.

The story behind this short squeeze is pretty epic. Truthfully, I kind of love seeing an army of traders stick it to a big Wall Street institution. There’s a lot of shady business on Wall Street. To me, it’s karma.

But for new traders, this isn’t a stock you should trade. If you chase GameStop over $200 or $300 per share, your risk is huge.

Don’t lose focus. If you have a solid trading plan, stick to it and find the next stock that fits your setup. That will serve you better in the long run. The smartest thing to do with GameStop now is to sit back and watch the show.

What do you think about this GameStop madness? Let me know in the comments!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”