Trading IPOs
Can we turn trading IPO’s into a more successful strategy than just relying on luck and gut feelings? By using a chart of price action, and money management techniques, we can trade any IPO successfully and with lower risk.
The best guide to a successful IPO is when it closes over subscribed. Trouble is, by then it is too late to pick up any shares before listing. The danger is that if we try to buy the IPO when it first lists we can end up paying too much. Or worse, get the shares and watch the price steadily decline. Sometimes over subscribed IPO’s just show us there are more fools in the market than we thought. We want to avoid being a fool so we use trading techniques, which help us to understand what the market is telling us. If we listen to the newspapers, to the company publicity or the ill-informed crowd of would be buyers, we often get a wrong impression.
Pricing IPO’s is a difficult task. Even the sponsoring brokerage gets it wrong, with some IPO’s listing well above, or sometimes, below the subscription price. One of the problems is that the company and the brokerage want to get the best price possible. They choose the best figures and run a publicity campaign. It is difficult to build a true picture of the fundamentals.
From a charting view, the IPO is particularly difficult. The tools of technical analysis cannot be used because there is no previous price history. The stock starts in uncharted territory, so there are no reference points for support, resistance, or even trend lines. Indicators that require a day’s or weeks of data, such as moving averages and stochastic, cannot be applied.
The trader is left only with the activity of the market itself once the IPO is listed. This is all we need to make a good trading decision. The decision is based around the count back line, and the trailing stop loss point based on the count back line. It keeps us out of the trade until at least the fourth day, because we need a minimum of three days of price activity to apply these techniques. The objective is to identify the direction of the trend, and only enter the trade when the trend is up.
We start with the count back line used as an entry signal in a trend reversal. This is a short-term resistance level calculated from every new low in a falling trend. When prices close above the resistance level, there is a high probability that the trend has changed direction. In stocks with a well-established trading history, we also use other trend indicators, such as the Guppy Multiple Moving Average, to confirm the count back line entry signal. With an IPO we use just the count back line.
Using this technique with an IPO a entry is signalled with the close above the count back line at $2.30. Using a minimum of 3 days of price activity, we are able to establish the upward direction of the new trend. The count back line is based on end-of-day data, so the signal is given at the end of the day’s trading. The trader takes an entry on the next day of trading at around $2.45. Sometimes we get a better entry price, and sometimes we have to pay a little more. The count back line provides the trigger point for action.
Once the trade is opened, it is useful to manage it with a CBL stop loss until the trend is well enough established to track with other tools, such as a straight edge trend line, moving averages etc. Until it is possible to apply these tools, the trader’s focus must remain purely on the money management aspects of the trade.
With some IPO’s we want to stand clear, because prices start to fall. Rather than buying stock in the first few days, we know we can get stock at lower prices if we wait. The count back line gives us a way to decide when the downtrend has stopped and the new up trend has commenced. The same technique when applied to IPO 2 keeps us out of this trade until it reverses the downtrend.
We ignore the potential breakout in the area circled because of the extreme confusion with the placement of the CBL entry line. Note how the CBL line, shown as x1, y1, and z1, moves up and down in a confused pattern. This failure of consistency warns us that we should not act on any apparent CBL trend break signal.
The market will tell us when IPO 2 is a good trade. We look for a steady falling CBL entry line. Then, when prices close above the most recent count back line, and there are other confirming factors, there is a strong indication that the trend has changed to up.
Some IPO’s give very rapid buy signal, or tell the trader clearly to stand aside from the market. The count back line entry technique is applied as a stand-alone trading tool until other technical analysis indicators can be used. These include straight edge trend lines, and after the required number of days, tools, such as moving averages, or indicators, that use moving averages in their calculations. This includes stochastic and MACD analysis.
The count back line approach uses the smart money as a reference point. The smart money tends to be most active towards the close, as institutional and professional traders fill, or close positions. Although less experienced traders and investors are frightened by market events, the professional traders tend to take advantage of these extremes. They buy when prices drop to low, and sell to take profits when prices rally to extremes. The count back line trigger signals are based on the opinions of the smart traders, and these are shown by the close.
Our next challenge is to ride the developing trend and protect our profits. As soon as an entry is made, we use the count back line to calculate the trailing stop loss.
The count back line technique lets us understand what the market is telling us about the value of the IPO. It allows the trader to establish the direction of the short-term trend, and any changes, or reversals. When combined with a stop loss technique, the trader is able to protect trading capital, and later as the trade develops, protect his profits. We use market activity, rather than shaky fundamentals, optimistic publicity and market rumour, to trade the IPO with a lower level of risk.
While it is true that we miss the action in the first few days, and might surrender some good profit, it is also true that we reduce the risk of jumping on board a sinking IPO. Not all IPO’s are tradable as IPO 3 illustrates. We need to find those that will make us money and avoid those that will cost us money. Unless the IPO gives a clear buy signal, it may be a good idea to stay out of the market and wait for more definite opportunities.
The best trading approaches are designed to manage risk and this does not always mean we get the maximum possible profit. We give ourselves a better opportunity to prosper if we listen to the market rather than market hype.
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Using this technique with an IPO a entry is signalled with the close above the count back line at $2.30. Using a minimum of 3 days of price activity, we are able to establish the upward direction of the new trend. The count back line is based on end-of-day data, so the signal is given at the end of the day’s trading. The trader takes an entry on the next day of trading at around $2.45. Sometimes we get a better entry price, and sometimes we have to pay a little more. The count back line provides the trigger point for action.
Once the trade is opened, it is useful to manage it with a CBL stop loss until the trend is well enough established to track with other tools, such as a straight edge trend line, moving averages etc. Until it is possible to apply these tools, the trader’s focus must remain purely on the money management aspects of the trade.
With some IPO’s we want to stand clear, because prices start to fall. Rather than buying stock in the first few days, we know we can get stock at lower prices if we wait. The count back line gives us a way to decide when the downtrend has stopped and the new up trend has commenced. The same technique when applied to IPO 2 keeps us out of this trade until it reverses the downtrend.
We ignore the potential breakout in the area circled because of the extreme confusion with the placement of the CBL entry line. Note how the CBL line, shown as x1, y1, and z1, moves up and down in a confused pattern. This failure of consistency warns us that we should not act on any apparent CBL trend break signal.
The market will tell us when IPO 2 is a good trade. We look for a steady falling CBL entry line. Then, when prices close above the most recent count back line, and there are other confirming factors, there is a strong indication that the trend has changed to up.
Some IPO’s give very rapid buy signal, or tell the trader clearly to stand aside from the market. The count back line entry technique is applied as a stand-alone trading tool until other technical analysis indicators can be used. These include straight edge trend lines, and after the required number of days, tools, such as moving averages, or indicators, that use moving averages in their calculations. This includes stochastic and MACD analysis.
The count back line approach uses the smart money as a reference point. The smart money tends to be most active towards the close, as institutional and professional traders fill, or close positions. Although less experienced traders and investors are frightened by market events, the professional traders tend to take advantage of these extremes. They buy when prices drop to low, and sell to take profits when prices rally to extremes. The count back line trigger signals are based on the opinions of the smart traders, and these are shown by the close.
Our next challenge is to ride the developing trend and protect our profits. As soon as an entry is made, we use the count back line to calculate the trailing stop loss.
The count back line technique lets us understand what the market is telling us about the value of the IPO. It allows the trader to establish the direction of the short-term trend, and any changes, or reversals. When combined with a stop loss technique, the trader is able to protect trading capital, and later as the trade develops, protect his profits. We use market activity, rather than shaky fundamentals, optimistic publicity and market rumour, to trade the IPO with a lower level of risk.
While it is true that we miss the action in the first few days, and might surrender some good profit, it is also true that we reduce the risk of jumping on board a sinking IPO. Not all IPO’s are tradable as IPO 3 illustrates. We need to find those that will make us money and avoid those that will cost us money. Unless the IPO gives a clear buy signal, it may be a good idea to stay out of the market and wait for more definite opportunities.
The best trading approaches are designed to manage risk and this does not always mean we get the maximum possible profit. We give ourselves a better opportunity to prosper if we listen to the market rather than market hype.
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TRADING METHODS - IPO TRADING An Initial Public Offering (IPO) creates chart history. Many have emotional appeal, but this does not guarantee profitable trading. Trading is enhanced when the demand/supply equation is out of balance. This is shown by lots of positive press coverage in the lead up to the IPO. Better IPO trading relies on money management techniques to select an entry point and ride the price action until the stop loss conditions are met. High probability float trades are taken based on the price action of the first week, but again they rely on money management to set stop loss points to protect profits. |