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Read This Before You Chase Meme Stocks!

Read This Before You Chase Meme Stocks!

Free popcorn.

That was AMC Entertainment’s (NYSE: AMC) newest offer to retail investors this past Wednesday.

The company is courting new shareholders because AMC needs fresh funds to survive. That’s because the company had to borrow heavily and defer lease payments to make it through the pandemic.

That’s why, the next day, AMC announced that it would offer 11 million new shares to investors.

It also mentioned this in the filing:

“Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”

This saga beats front-row seats for any movie I’ve seen recently.

Despite the lure of big gains, chasing meme stocks is nothing but gambling, as AMC points out.

But if you can’t resist the temptation of making a quick buck (and free popcorn), then you at least need to have an exit plan.

Have an Exit Plan

Successful traders don’t just think about making money, they worry about how much they could lose.

Having a repeatable discipline to uncover great trade ideas is important. But having an exit strategy is just as vital. It’s all part of a sound risk-management strategy.

There are really two key features to managing risk: position sizing and stops.

The former covers how much to risk on any given trade. The more you stand to lose, the less capital you should risk.

The latter entails knowing when to get out … whether that’s cutting losses short or protecting profits.

And just as there are many investment strategies to identify new opportunities, there are several ways to craft an exit strategy.

A Tool to Tell You When to Get Out

Trailing stops are a popular way to protect from losses or book profits. You can set a percent threshold on when to sell, such as when a stock has pulled back 10% from a recent high.

Or you could sell when the stock price crosses below a moving average (MA), such as the popular 50-day MA.

But the big problem with trailing stops is that each stock is treated the same. It doesn’t account for how much a stock’s price tends to move.

For example, AMC has been more volatile than Procter & Gamble (NYSE: PG) this year. So, it makes sense that you would take such price movements into consideration when deciding on an exit.

That’s why you should check out Ted’s recent chat with TradeSmith CEO Keith Kaplan. They’ve discovered a way to implement dynamic trailing stops on any stock.

It automatically adjusts in response to changing volatility. Just click here to watch Ted’s chat with Keith and learn how to generate up to 18X gains on your positions!

Best regards,

Clint Lee
Research Analyst, The Bauman Letter

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