News | February 24, 2022, 13:01 PM | The content is supplied by a Guest author
Thanks to their volatility and the incredible ‘rags-to-riches’ stories they generated, meme stocks have taken the financial world by storm since 2020. Anyone who has witnessed the unbelievable ups and downs of GameStop and AMC Entertainment Holdings would find it hard to resist joining the craze.
While it’s possible to earn astronomical profits from trading meme stocks, getting involved with the heavily hyped names is also tremendously risky. We understand the challenges of meme stock trading. Therefore, we’ve put together a few tips and tricks to help you minimize your risks.
Before we jump into the discussion, let’s not forget that your chosen broker has a significant impact upon the quality of your stock trading experience. Exness stock trading products offer some of the tightest spreads known in the industry. The multi-asset broker can also execute your orders in as little as 0.01 seconds. The favorable trading conditions can help you make the most of the opportunities in the global stock market.
Now, read on to find out how to make the most of meme stock trading without breaking the bank.
Have a Solid Reason for Trading a Meme Stock
Meme stocks are characterized by the hype they create on online forums and social media. It’s easy to get sucked into the frenzy and forget about how challenging and risky trading meme stocks can be. While the noise meme stocks make is what attracts you to them, it’s important to remain rational and make sure you have a valid reason for trading a meme stock.
For instance, as the COVID-19 pandemic begins to stabilize, the cinema business is likely to make a comeback. It is then reasonable to go long on AMC Entertainment Holdings with the prediction that the cinema chain will return to profitability.
Never open a trade only based on rumors and your gut feelings, or you may fall into the trap of emotional trading and end up suffering from unnecessary losses.
Limit Your Exposure
Meme stocks are highly speculative. They can give you some jaw-dropping returns if you manage to catch them on the upswing, but their volatility means it’s best to only trade them with money that you can afford to lose.
We recommend you allocate a maximum of 10% of your trading portfolio to meme stocks. This way, you won’t be putting your long-term financial goals in jeopardy.
Be Sensible with Your Position Size
One of the most worrying phenomena seen across online trading communities is that many traders are approaching meme stocks with an ‘all-in’ attitude. Driven by strong convictions, they tend to shoot for the moon by opening large positions using leverage.
However, blindly being ‘all-in’ is extremely irrational and can expose you to serious financial risks. To protect your money, keep your risk tolerance in mind and determine your position size accordingly. Stick to the percentage of risk that you are willing and able to take on. We also recommend having an exit strategy in place so that you won’t be taken by surprise when the market moves against you.
Diversify Your Portfolio of Meme Stocks
It’s never wise to put all your eggs in one basket, and meme stock trading is no exception. Putting all your resources into a single meme stock is an invitation for disaster. On the contrary, investing your funds across a range of different names can help distribute your risks evenly.
By having a diversity of meme stocks in your trading portfolio, you won’t be taking a catastrophic blow even if some of your trades don’t work out. If you are lucky or skilful enough to hit it big with one of your meme stocks, your profit will probably be big enough to cancel out the losses you have suffered.
Should You Trade Meme Stocks?
The meme stock trading era is still at its dawn, and we are expecting many more staggering stock rallies and crashes on the horizon. The volatility of meme stocks means you will be exposing yourself to substantial financial risks by trading them. While the potential reward is tempting, there’s a good chance that you will lose your money.
This is why we are against trading meme stocks with money that you can’t afford to lose. If you have some spare cash and would like to challenge your trading skills, it doesn’t hurt to invest it into some of your favorite meme stocks following the above tips. You may get your hands on some impressive profits if the market moves in your favor.
The key is to remain sensible. Before you decide to trade any meme stocks, spend a little bit of time to get to know them, define your risk limits and follow them through. Having your finances destroyed in hopes of becoming rich overnight is the last thing you want.
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