With the recent price action in the stock market, we thought we would revisit a couple of pieces we wrote about “stonks” and momentum investing almost three years ago.

We find it helpful to review our archives to look at similar situations today.

Given what we have seen in the last few weeks, we think it is time to revisit the world of “stonks” again!

You've probably heard the word "stonks" a lot this year...

It has been taken up by the army of retail investors and day traders focused on the market for both profit-making and fun, but not so much focused on the risks. This crowd resides on digital platforms like Reddit's WallStreetBets forum or Twitter, and these folks are responsible for the craziness that recently happened with shares of video-game retailer GameStop Corporation (NASDAQ: GME).

As the politics and culture website Slate put it

“#Stonks are all anybody can talk about on Twitter, where it’s become the hashtag of choice for everyone following the escapades, a six-letter shorthand for the absurdity and excitement of the moment.”

I'm not here to judge whether this is something that folks should be doing. That's up to them and their risk tolerances.

But I'll note that "absurdity and excitement" aren't new things in the stock market.

We've seen plenty of stonks in the past. Go back to the dot-com bubble of the late 1990s and look at some of my favorite examples of the mania, like theglobe.com and Pets.com. Those would have fit right in with the stonks crowd today.

Every bull market – and especially one that enters its "bubble" phase – has certain individual stocks and groups of stocks that defy most traditional measures traders and investors use. They exhibit massive volatility, often with no rhyme or reason that an investor could understand.

That means stonks can be a great place to make and lose money.

Real money can be made when an asset can trade up 100%, 200%, or even 1,000% in months, weeks, or even days. (Of course, that's if you do so with the proper discipline.)

Again, I'm not going to judge (or recommend) whether folks should be trading stonks. But if you choose to do so, keep these three guidelines in mind...

1.  Volatility is Symmetrical

Stocks that rapidly go up a lot can go down equally as fast.

As a stock goes from $5 to $30 per share in two months, investors cheer and celebrate their acumen and the brilliant execution of the underlying company.

But when that stock collapses to $15 per share in the next 15 days, those same investors say the company is going bankrupt and short sellers are to blame. (Never mind that if they bought at $5 per share, they're still up 200% on their original investment!)

If you're trying to make a lot of money fast, remember that at some point, you'll lose a lot of money fast... Be prepared.

2.  Book Some Gains

This is a key to "money management."

If you own a stonk that quickly goes up 100%, why not sell 55% of your position?

Let's use a hypothetical $100 example. You invest $100 in your stonk... And a week later, you have $200. Selling 55% would bank $110.

Not only have you guaranteed you get your original $100 back, but you've also locked in a 10% profit... And you still have $90 worth of your position to take advantage of more upside.

If the stonk goes up another 100%, you make another $90 – or $290 on your original investment. Sure, it's different from the $400 you would have made had you held the whole thing. But you'll sleep a lot better at night.

This brings me to the most essential guideline...

3.  Put Yourself in a Position to Win

Regular HX Research readers know that I always strongly emphasize the role of psychology in the overall stock market and trading.

One of the most critical methods for surviving periods of investing stress is figuring out how to avoid them in the first place.

Of course, these periods of losses are inevitable (especially with stonks)... But set yourself up to react rationally instead of emotionally.

The first two guidelines above speak to this idea. With trading stonks, be prepared for big moves. And by booking profits, you can take much stress out of the game.

Another vital thing to consider is the size of your "stonks portfolio." If you're going to play in these types of situations, be sure to size it right.

This is crucial on a day-to-day basis. Few human beings can function adequately if their entire portfolio sees swings of 30% (or more) in either direction daily. Very few people can consistently make the right trading decisions.

Sizing is also important because the era of the stonks will inevitably come to a close at some point.

When this happens, volatility will die down tremendously. And unfortunately for most stonks, it will tend to go only one way: down.

What was your favorite “stonk” from back in the day? Did you make or lose money? Let us know in the comment section below.

My view when trading stonks is always to enter every trade and size as if you were going to lose 100% of your money.

This should be the thought process behind your entire "stonks portfolio." If you lost 100% of it – while you would be upset – how upset would you be? Would it damage the rest of your financial situation?

Put yourself in a position where you're ready to lose 100% daily and make yourself a much better trader.

Again, it's not the approach we take here at HX Research – we're looking to consistently hit singles and doubles and take quick gains that can add up or find multi-year situations where you can multiply your money over time.

We will leave swinging for the fences with high-risk stonks to other folks!

Check out Enrique Abeyta’s conversation with Whitney Tilson on the HX Podcast.