Take yourself back to 2021…
Back to when President Joe Biden took the oath of office… a cargo ship blocked the Suez Canal… the delta variant reawakened COVID fears around the world…
And meme stocks were all the rage.
Remember that tumultuous time?
That’s when investors saw AMC Entertainment (NYSE: AMC) jump 2,694% in six months. And let’s not forget when GameStop (NYSE: GME) went up 1,914% in just one month…
And at the center of it all was an altcoin called Dogecoin.
Dogecoin is a cryptocurrency that was developed purely as a joke. It has no underlying value (it was never supposed to), so its rise to prominence makes the story I’m about to share even more ridiculous.
Several things happened to make the price of Dogecoin tokens skyrocket.
But they all had one thing in common…
Tech billionaire Elon Musk.
Musk started the trend in January 2021 when he tweeted a Dogecoin meme.
When he did, the token moved out of joke territory and became something worth watching.
That’s when a friend of mine decided to jump in.
Let’s call him “Phil.”
As Musk was tweeting, Phil was watching Dogecoin.
And after the token rose to $0.05, he jumped in and bought $150 worth.
Phil wasn’t serious about his investment and put the money in as a gamble. But serious or not, he and many others expected Dogecoin tokens to rocket “to the moon.”
It turned out his intuition was correct.
Two weeks later, Musk tweeted again about Dogecoin – causing the token to rise to $0.35.
Phil’s $150 investment turned into $1,050 in just a couple of weeks.
An experienced investor at this point would sell a little (at least) and lock in that gain.
But, as you’ll soon find out, Phil had no idea what he was doing.
He had dollar signs in his eyes and wanted more.
Saturday Night Live Meltdown
Only a few weeks later, Saturday Night Live – commonly known as SNL – officially revealed that Musk would host the show on May 8, 2021.
Leading up to the day of the show, the price of Dogecoin steadily climbed in anticipation of what Musk would have to say about the altcoin – rising all the way to $0.70.
The chart below shows Dogecoin’s price increase from when Musk first tweeted about the altcoin until the day of the show…
Phil’s investment in Dogecoin had been a heck of a ride. He was hooked at this point.
Many were speculating that Dogecoin could go all the way to $1 after the SNL episode, and Phil believed them.
There was no way he was going to sell any of it. He believed he was going to make it big with just one investment.
The week leading up to the show, I ran into Phil at the gym. He revealed he was up almost $2,000 on his initial investment.
I was gobsmacked. And I encouraged him to at least sell half of that to lock in some of his profits.
His response to me was “Nah, bro. It’s going to go to a dollar.”
There was nothing I could do to get him to see my way.
And it turned out to be his downfall.
Below is a chart of Dogecoin’s price performance over the course of the hotly anticipated SNL show…
Dogecoin dropped from $0.70 to $0.50 in the span of 40 minutes – nearly 29%.
Phil’s $2,000 turned into $1,400 in the blink of an eye.
And it gets much worse…
After this drop, Phil fell into another common trading trap – he waited for Dogecoin to rebound.
It never did.
In fact, it kept dropping.
Take Your Profits and Run!
I asked him, months later, if he’d sold any before its decline. He told me that he ended up with a measly $300.
Sure, he doubled his money. But he left over $1,000 on the table doing it.
So what did Phil do wrong here, and what could he do differently in the future?
First off, he didn’t listen to his good friend John.
Phil was up some 1,300% yet did nothing about it.
When you have that kind of attitude, no matter how high a position rises, you’ll always be wanting more.
Instead of holding on to all of it, he should have locked in some of those gains. He could have sold a little bit each time it moved upward.
The truth is, there are a lot of strategies out there that investors can use to protect their capital. (Though they aren’t one-size-fits-all, so it’s important to choose wisely.)
For instance, Alexander Green likes to implement a 25% trailing stop on new stock positions.
A trailing stop rises as the stock’s price moves up. When the stock declines, the trailing stop stays put. As Alex says, this stop strategy “protects your profits in the good times and your principal in the bad.”
Options positions, on the other hand, generally experience too much volatility for trailing stops to work well. When an option play goes up, Oxford Club strategists will often recommend taking partial gains (sometimes multiple times over the course of a rise) and letting the remainder ride to capture further upside.
The moral of the story is this: Don’t be a Phil. Strategically selling partial positions and adhering to a strict sell discipline will help you lock in profits.
Lessons like these remind us why it’s important to have a strategy and stick to it.
And the best way to perfect your skills is to get out there and start trading today.