Over the last couple months there has been a frenzy of trading not only in cryptocurrencies such as bitcoin but also in stocks that are related in various ways to cryptocurrencies and blockchain. It has been the biggest bubble for many stocks since the dot.com bubble in 1999-2000.
I have been trading these stocks aggressively and am the first to admit that many lack any fundamental basis for their strength and are likely to be worthless at some point along the road. I believe it is bubble action, but I think it will last far longer than many think is possible.
I've had a number of debates with Doug Kass and others about this trading. Doug believes it is gambling and asks, "If you believe that a sector is in a bubble and that it will burst, why trade an unpredictable and overvalued area when you can trade companies that will endure?"
The short answer to the question is that I don't care if these companies endure. I am only interested in the price action.
As a trader, I seek to profit as much as possible from stock movement. The appeal of these stocks is that they are highly volatile and offer the potential for huge gains. Fundamentals have nothing to do with it.
The objection that they are a gamble also is illogical. They may have higher risk, but they are no more a gamble than a position in General Electric Co. (GE) or Snap Inc. (SNAP) . A gamble is defined as nothing more than taking a risk in order to win money. All investing is a gamble to some degree.
The real objection here is based on the assumption that the level of risk is far too high for any reasonable person to take. On the other hand, when a stock moves many fold in a single day that goes hand in hand with high risk. High risk produced high rewards as well as high losses.
It is understandable that people are fearful and distrustful of a stock such as Riot Blockchain Inc. (RIOT) , which we originally bought in the SharkInvesting.com newsletter on Nov. 20, 2017, at around $8.50. It climbed to more than $45 in mid-December. We have actively traded during this period in various time frames.
Was this movement in RIOT justified by its fundamentals? I doubt it, but that was never the focus. My focus is always the price action, emotions and psychology that surround the stock. With so many "experts" calling these stocks fraudulent, the conditions were ripe for them to move even higher.
Doug told me he believed that this trade was luck. I agree. There is an element of luck to all trading and investing. There is no way to eliminate it because all trading and investing is a gamble.
The thing that Doug overlooks is that the key to trading stocks such as RIOT is to manage risk. You must set parameters for a trade and stick with them. Taking a loss should be routine. That is how you manage risk.
Many market players can't stand the idea of admitting they are wrong. They feel that it is a reflection on their abilities when they work hard to understand fundamentals and then the market doesn't do what it should do. They are convinced that it is the market that is wrong, not them, so they stay with the trade. That may work fine over the longer term. The fundamental research will make them feel secure.
Trading high-risk/high-return stocks such as RIOT is a different game. The focus isn't on fundamentals. Rather, the focus is on managing risk by watching price action.
The first thought of many novices when they look at the wild action in these bitcoin-related names is, "I could lose all my money." That is true only if they sit there and do nothing. You always can eliminate all your risk by immediately selling a position. That is the key. Selling must be a routine part of your methodology when you are trading.
Selling is how you manage risk. Once you understand and embrace that idea, the risk doesn't seem so crazy. There are still the obstacles of overnight gaps, trading halts and surprise news events, but the way to deal with that is through position size.
My approach to highly volatile stocks is always incremental. I make partial buys and partial sells and trade in numerous time frames. I only hold the largest positions for the shortest period of time, but then hold smaller positions that I allow much more leeway.
The key to trading anything is the recognition that you can control risk. Once you embrace that idea, the wild moves in stocks such as RIOT don't seem so random and unpredictable. You can handle them because you will cut your exposure when they don't cooperate.
The best way to learn to trade highly volatile stocks is to take small positions with very tight stops and become used to taking small losses. Keep trying to understand the movement and don't be discouraged if you take a lot of losses. Losses should be viewed as just part of the trading process and not an indication that you are doing anything wrong.
All trading is driven by fear -- either fear of loss or fear of not making enough money. You must address that fear in order to make big money, and the best way to do that is to learn how to control risk.
This sort of high-volatility trading is not for everyone. It requires vigilance and planning. You can't be passive, but you still must be patient at times.
Without high risk you cannot earn big rewards, but risk can be controlled if you know how to sell.