This week the short squeeze of GameStop, among others (AMC and BBBY), was addressed on Capitol Hill. Robinhood, Reddit and other players were grilled by lawmakers. This clash of professional vs. retail traders was unprecedented.

Professional traders have always been privy to certain order flow information. Retail traders have a harder time using this data. But they do not typically trade with or against institutional traders. Retail traders trade through brokers, who, on their behalf, trade specialists or other liquidity providers. These liquidity providers adjust their bids and offers in response to this “order flow.” When a stock is trending upward, specialists/liquidity providers adjust their bids and offers higher in response to demand pressures.

When a stock is trending lower, specialists/liquidity providers adjust their bids and offers lower in response to supply pressures.

The ability to adjust the bid-offer spread according to order flow is an advantage liquidity providers have on the individual investor. And getting to see this order flow first helps—a lot. In fact, order flow is vital to professional traders’ strategies, and they pay big bucks to get the edge of being able to see it first.

Order Flow Meets Value

GameStop (GME) share prices were essentially stagnant for a couple of years. Most of the volume accumulated between $4 and $10 during that time. Some value-based traders used $4 as support and $10 as resistance. But primarily one—very vocal—retail investor stated on Reddit that he viewed GME as more valuable than $10, and soon a couple of hundred thousand of his closest friends followed along. This drove the stock price higher and higher. But savvy institutional traders believed the stock became greatly overvalued and took the short side of their buy orders—big time. Interestingly, social media’s involvement actually resembled the role of an institution, influencing value greatly.

Collectively, retail investors took control of order flow and higher prices won out. The combination of amassing retail bulls and over-weighted short from the institutional bears led to the infamous short squeeze. The extraordinary jump in prices was a combination of buyers following the “HOLD” mantra on Reddit and short sellers losing more and more as the stock drove to nose-bleed heights. That led the short sellers to buy back their shares at a loss to prevent even greater losses for themselves and their investors. A key point is that the companies involved in the short squeeze did not increase in value overnight, they only increased in price. Abrupt and ferocious moves like these are rare and normally a short-term phenomenon. However, from every strange occurrence there are lessons to be learned.

The Squeeze Takeaway

The first lesson from “the squeeze” is that trading is risky. We all know that, and this case proves it. Thus, hedging your bets or defining risk is the first move a trader should make after setting a position. We can ride out unexpected moves if we are properly hedged or have defined risk.

Another takeaway is to identify when status quo is changing. If a market has been rangebound for a long time and then breaks free, do not fight it. Stock price action doesn’t always make sense in the short term. As the saying goes, “The market can remain irrational longer than you can remain solvent”—get out of the way. Or…consider (cautiously) getting temporarily on the side of strength. Now, the question is, how do you get on the right side of one of these extraordinary events?

The best advice is: Be cautious. When a stock moves irrationally and violently, traders can capture profits whether or not the move makes sense. Trade small. Manage your risk. Use stops. Strategically use option strategies that have limited risk. And never, EVER, buy into the hype of what strangers say online.

That said, trade well.

Dan Passarelli and John Seguin, Market Taker Mentoring