How to Find & Trade the Next MEME Stock...

In this video, I break down how I trade meme stocks to hit a home run while keeping risk at a minimum. I also look for the next meme stock potential and enter into a trade!

So far, 2021 has been the year of meme stocks. With Gamestop and AMC going bananas, you probably saw a bunch of people on the internet make life-changing money, and you may be bummed that you missed out or even worse, bought at the top and got left holding the bag.

I often get asked if it’s too late to get in on a specific stock when it’s experiencing a huge run-up, so I wanted to break down what you can look for to identify a potential opportunity, when you can get in, and how to make sure you don’t get left holding the bag.

Ground Rules

Let’s discuss my approach to trading memes. First, the most important rule is to only use money you’re okay with losing. I say it all the time, but it’s especially important with stocks that may not have the strongest fundamentals. So don’t use your rent money or borrow money to trade memes.

Second, by their nature, most meme stocks aren’t positions that you buy and hold for years. You’re likely going to be in and out of the position pretty quickly – maybe a week or two, maybe a few days, it all depends, but in all likelihood this is a short-term play and thus, here in the US you are subject to short-term capital gains tax which is taxed as ordinary income. So keep in mind that if you make any money trading you’ll want to set aside roughly 30% for taxes, and because I’m not a tax professional, you should check with an accountant to be sure of your tax situation.

Third, there will be haters and that’s okay. A lot of more traditional traders look down on meme stocks and stay away from them completely. That’s fine. Other people may think meme stocks shouldn’t be memes and are legitimate companies to hold in your portfolio. That’s fine too. And others may think you have to hold your position until it reaches the moon. And that’s fine as well. I don’t have a strong feeling either way, and in my view, people are free to trade how they like. Every trader trades with the intention to make money. That’s the only goal. So if you make money from memes or blue chips, who cares?

Fourth, a lot of people are proclaiming one stock or another is the next Gamestop or AMC, but here’s the thing. Not everything is going to have an insane short squeeze like these two have had. Squeezes on a smaller scale happen on a regular basis, but having a stock go from $3 to $483 in like 7 months is definitely an extremely rare situation. So it’s important to adjust your expectations.

Finding the Next Meme Stock

The people that profit the most on meme stocks are people who got in before the hype when the price was low and it wasn’t all over the news or Twitter or wherever. Again, as I’ve said, when your grandma calls asking you to buy a share of Gamestop for her, that is not the time you want to be getting in too.

So since hype is part of what turns a normal stock into a meme stock, you want to find them before everyone else jumps on the bandwagon.

WallStreetBets on Reddit is likely the birthplace of meme stocks, so let’s start there. It’s a bit different now that it’s become a household name and is home to over 10 and a half million redditors. News outlets and hedge funds alike are definitely keeping an eye on the subreddit to find ways to exploit it. But so can you.

The simplest way is to look at the DD posts – or due diligence. Here you can read what stocks people are talking about and why they believe it’s a good trade idea. There are plenty of terrible posts with flawed logic or no logic at all, but there are actually pretty good ones too, so you have to be able to discern between the two. Oftentimes, the comments will have additional insights or opposing views, so you can start to sus out what has potential and what doesn’t.

Once you have a list of tickers that sound like interesting plays to you, you can do your own due diligence on these companies. Whether that’s looking at other subreddits, or on a site like finviz… or even something like Stocktwits. Of course, here you just have a bunch of random people who may have no idea what they’re talking about or people just trying to pump something for their own benefit, so take everything with a grain of salt.

You can also search the ticker on Twitter, again to gauge public sentiment here. I sometimes check option flow on a site like Tradytics as well, just to get an idea of things.

With the stock market, nothing is for certain. No one on Reddit or elsewhere really knows what direction a stock will go, but you can start to compile a case for why a stock is undervalued and primed to pop off.

Gamestop first hit my radar in November last year because of posts I saw on WallStreetBets. Of course in hindsight, it’s easy to see, duh should’ve bought it at $11, but back then, no one except Roaring Kitty and a handful of others knew the potential. So let’s take a closer look at Gamestop to identify a realistic way we could’ve traded it.

Look at Volume

So here I’m on ThinkOrSwim which is a platform through the brokerage TD Ameritrade. We have the daily chart of Gamestop, where each candlestick represents one day. Let’s go back to January, before it’s first big spike. Let’s say Gamestop is on your radar, but you aren’t sure if it’s ever going to squeeze, so you haven’t bought in yet.

The price was in the upper teens for a few weeks before launching into the 30s and beyond, so let’s really look at what went on.

On January 12th, not much happened. It opened at $19.96 and closed at $19.95… so nothing of interest with the price. The trading volume was 7 million, which was also unremarkable. But then, seemingly out of nowhere, it had a massive day, opening at $20.42 and closing at $31.40. But here is what’s most interesting – the volume. Over 144 million shares were traded that day – 12 times the average. I mean, just look at that volume bar relative to everything previous.

Scale In

If I was looking at Gamestop as a meme candidate, this would be the day I would want to enter a position. So here’s that day on the charts, with each candlestick representing 5 minutes. GME had a lot of volume in the morning, which would’ve piqued my interest. But here’s the thing – I never want to chase a stock. When it’s pumping, I want to see it pull back and re-test before jumping in. The first time we really have that is here. The price came back down to both our 21 EMA and VWAP. VWAP is the orange line, and it stands for Volume Weighted Average Price and it basically shows you the average price the stock has traded at throughout the day.

So if you played this just about as perfectly as you could, this $30 area would be a great entry. It closed the day at $39.92, so you’d be sitting pretty comfy with a $30 per share cost basis.

So let’s say you have $1,000 of meme money that you can put into something and hope it pops off. You buy 15 shares of Gamestop to start your position at $30.

The stock then spent the next 5 trading days accumulating – nothing too exciting, but also it didn’t come anywhere close to your $30 entry. The volume over these days definitely was lower than on the 13th, but still well above where it had been previously. The share price spending so many days in the 30s and 40s should give you confidence that there is something to this play. It’s not like it crashed back down to $19 the next day.

So I would consider adding to my position after the price has stabilized in this area. If you were still uncertain, January 22nd definitely gave you more confidence in the play. It opened at $42 and ran all the way up to $76 before closing at $65. So here’s that day, on the 5-minute chart. It had a really nice run-up with some great volume. Then we saw it re-test down by VWAP and our moving average.

If I was looking to add to the position, I’d buy around this $58 range where it moved sideways for awhile. So let’s say I bought 9 shares at $58. I now have 24 shares with a cost basis of $40.50.

Scale Out

Now, we’re sitting pretty with our 24 shares. The price rocketed up soon after, hitting that high of $483. Realistically, I’d have plenty of time to sell in the $300s, but if I really have strong conviction it could go higher, I don’t mind holding because the price is so far from my cost basis. The safest route would be to take your initial capital off of the table by selling about $1,000 worth of shares, so that you can sit back and play with purely profit. Now, the price of course did come back down to earth, again giving you plenty of time to sell with a healthy profit. Just one day came below our cost basis by $2, but closed just above at $40.59.

Of course, Gamestop wasn’t done, and launched off yet again. And again, we have a day with massive volume 83 million, compared to the previous day’s 7 and a half. So if I’m still holding shares, again I can sit comfortably and watch the action. There’s plenty of time to scale out of the trade in the upper hundreds and 200s if I want.

Reality Check

Okay, that was hindsight so it’s easy for me to look at the chart from the future. If you want to see a breakdown of how I actually played Gamestop, here is the link to that video. But I scaled in as my conviction grew and scaled out to take my initial capital off of the table.

But the problem is you had to have your finger on the pulse to get in early. It didn’t reach ultimum hype until the stock was in the hundreds. So when I had people asking me if buying at $180 or $250 was too late – well from my perspective, it’s far too late and there’s so much more to lose. If you buy at $200 and the price comes crashing back to $30, you just lost $170 per share, whereas I would’ve only lost $10.50 per share, assuming I didn’t take any profit whatsoever and didn’t sell on the way down.

The key here is to be plugged into these communities where people are talking about stocks and have a list of candidates that you can keep your eye on.

Let’s take a look at a few other examples.

AMC

Here’s AMC on the daily chart. If you know that it also has high short interest and could possibly squeeze like Gamestop, when might be a good time to buy?

The stock was in the $2 range, with about 40 million in volume until the 15th of January. Here it had a volume of 162 million. The price didn’t do much that day, but all of that volume should get our attention.

The next trading day, it had a nice gap up to open the day with lots of volume again. So here, I’m waiting for the volatility of market open to die down and would consider entering in the $2.70-range. If I missed that entry, I would definitely look at entering after the next run-up when it came back to VWAP. So let’s say I have my $1,000, and I love the AMC play, maybe I buy 160 shares at $3. Bad case scenario, the price falls back down to $2, and I lose $1 per share. Good case scenario, it goes to the moon, and I ride the rocket there.

Of course it did run up and hit $20, and when it came back down, it was still plenty far away from our cost basis of $3. More recently it hit a high of $72. That’d take your initial capita of $480 and turn it into over $11,000. Even if you don’t sell at the top, the price is currently in the $40 range, which is just a crazy return on your investment. The bottom line is if you got in when you saw volume start to spike, you are sitting pretty without a worry in the world.

BB

For another quick example, let’s look at Blackberry. Before every run-up, we see volume start to grow. Except for that first one. That one came out of nowhere. But on January 14th, it had 8 times the volume as the day previous. And more recently in May, 26.5 million in volume on the 26th compared to 7.5 million the day prior.

AHT

Here’s one more – AHT. We see a large spike in volume on April 28th on 49 million compared to 11 million average. Then over the next several weeks it ran up to $7.

Real-Time

So obviously not every spike in volume leads to a run-up, but when considering meme stocks, it’s a good idea to pair due diligence with volume to help identify potential opportunities.

So here’s a meme play I’m trying out. One I’ve had my eye on and missed the latest pop in price is Workhorse. According to highshortinterest.com, they are the most shorted stock with almost 42% of the float sold short. I’ve read some DD on reddit, saw this post from Ortex on Twitter – they actually called the Gamestop and AMC short squeezes fairly well – and it looks like their short squeeze indicator went off today for Workhorse.

I checked it out on Tradytics, and things are looking bullish over there. On the chart, June 2nd was a big day for the price and 3 times the average volume was traded. Volume is still relatively high, and today the price dropped 10%, hovering right around $15 per share. Right before the market closed, I grabbed 4 call contracts for July 16th with a strike price of $16 for a total of $980. Now generally, options are a bit riskier with something like this. The implied volatility is high at 144%, but I still felt the contracts were cheap enough where it was worth a shot. A safer play would be buying shares instead.

I really want this $15 area to hold, and it’s possible before this video even goes live that I cut the trade for a loss, who knows? But I’m buying at a price area that has been supported several times, so I can feel pretty safe with this entry, and if support fails, I can cut the trade for a small loss. I’d love to see the price reclaim the $18 range and potentially squeeze higher.

Final Thoughts

Trading meme stocks can definitely feel like a crapshoot most of the time, but in my opinion, the best way to do it is to buy in at a price point that limits your risk. Combining due diligence, social sentiment, and spikes in volume on the chart can hopefully help you catch some stocks before they rocket off. Memes are inherently riskier than other stocks, but they also have pretty enticing upside. I’m not sure how long meme stocks will be turning smooth-brained apes into millionaires, but with the huge increase of retail traders, it may be here to stay.

Without spamming, let me know in the comments which meme stocks are on your radar. I’ll also be sure to let you know how the Workhorse trade pans out – you can also follow me on Twitter. If you would do me a favor and hit that thumbs up button, consider subscribing if you haven’t already, and I’ll see you in the next one.