Price Action Trading is an approach to speculative trading that involves looking at recent price movements (also known as the “Price Action”) and using analysis to anticipate which price movements are most likely to occur. With a robust price action trading strategy, you can detect large market changes before they begin to unfold.
As any experienced trader will tell you, market conditions—and even more, asset-specific conditions—can change incredibly quickly. Nowhere was this more evident than the recent GameStop (GME) rally of late January (2021). In an extremely short amount of time, despite few actual changes to the company’s finances or operations, the well-known video game retailer watched its stock increase tenfold in just a few weeks.
Following this unexpected rally—which pushed a short-positioned hedge fund to the brink of bankruptcy—traders and speculators around the world began asking questions. What sparked the GameStop rally? Does the stock really have what it takes to make it “to the moon”? What broader implications does this have for investors?
It is clear that we are now in a new era of trading. In this new era, price action trading strategies will become even more important, not less. Below, we will discuss the most important things to know about the GameStop rally, this new paradigm, and what this means for price action traders around the world.
What Exactly Happened with GameStop?
Beginning in January 2021, as described by The Independent, “a battle between an army of amateur investors and multi-billion dollar hedge funds has ignited a trading frenzy, sending the share prices of some previously unfancied surging while delivering a kicking to the short-sellers who bet against them.”
GameStop was the most notable beneficiary of this apparent “frenzy”, but other companies, such as AMC Entertainment (AMC) also benefited.
Using social media, particularly Reddit’s popular “wallstreetbets” forum, traders around the world coordinated a heavy investment in GameStop. Many of the investments were incredibly small, often less than 100 USD. However, the collective effort was enough to cause Melvin Capital—an apparent “enemy” to amateur traders—to lose more than 460 million USD.
The rise of the “amateur trader” is somewhat new—trading platforms like Robinhood, for example, allow anyone with an account to make trades without fees. This trend has undoubtedly helped democratize the trading community, but it has also created some complications, such as the recent GameStop frenzy.
In response to the outbreak, many of the world’s largest brokers put a temporary hold on the buying of GameStop and other stocks, something that is legal (and actually somewhat common) but will certainly result in several class-action lawsuits. The frenzy, and reactions, quickly gained global attention. While the price action of GameStop has since trended downward, causing most of the sudden gains to evaporate, the effects these events have had on the market will carry on.
Entering a New Era of Trading
The GameStop frenzy of 2021 was an unusual event that, for the most part, has mostly settled down. However, while the stock’s price may have dropped back down to “normal”, it is clear that many components of the trading world have permanently changed.
In a way, the most notable change is that markets have become more democratized. Now, a small group of non-sophisticated traders, largely using trading platforms with no commissions, can coordinate and change the price of various assets at will. Preventing these sorts of behaviors in the future is nearly impossible without heavy intervention.
As a result, price action traders can expect an ongoing increase in volatility. While increased volatility does, in fact, mean that every position becomes a bit riskier, it also creates a situation where individuals that are “in the know” can earn significantly greater returns. Had someone implemented a price action trading strategy—especially one using market geometry—they may have been able to predict GameStop’s largest price movements before they actually occurred.
The Importance of Price Action Trading Strategies
The entire purpose of using price action trading strategies is to identify price changes before—not after—they occur. With the right price action strategy, such as Triple Threat Trading Patterns, traders can use candlestick charts to prematurely detect reversals, pinpoint the start of new trends, and also filter out noise that is present in the market.
During the GameStop rally, millions of traders—many of which were entering the market for the very first time—ended up losing significant amounts of money. After hearing buzz from their friends and online, they decided to purchase shares of GameStop around 300 USD and hoped that the price would climb even higher.
In some cases, these positions were opened simply to “stick it to the man” and show that the people, not hedge funds, are the ones controlling the markets. But in many cases, people were severely disappointed by their losses. They were caught up in the excitement, making trades in response to their emotions, and ended up buying high and selling low.
A price action trading strategy can help traders in every market—even relatively stable markets like major forex currency pairs—avoid these common traps. Using a robust price action approach can cause traders to make moves with a much greater sense of precision. Had someone been using price action trading metrics—Fibonacci Ratios, Breakout Analysis, etc.—they could have bought GameStop around 10 USD and sold well above 300 USD. This is not just a theoretical exercise—many traders did, in fact, apply these theories in practice and were able to make a lot of money.
There is no way to completely eliminate the risk of trading, something that today’s increasingly volatile markets have made clearer than ever. There are, however, many things that traders can do to position themselves for success. The GameStop frenzy should not deter new traders from taking risks, rather, it should teach them that taking risks can be rewarded when there is price action evidence supporting a given position.
We might not know what the next “GameStop” might be, but we do know there are many viable trading strategies that can help position you to discover it early.