Have you ever considered trading Initial Public Offerings (IPOs)?
They can be perfect for day traders…
But not all the time. Trading IPOs comes with risks.
Learn more about managing your risk in my article here.
With an IPO, you’re dealing with a stock that has no prior data to use for any kind of fundamental analysis.
And what about data for technical analysis?
As a day trader, technical analysis is my bread and butter…
Without any data, how can I chart it, much less trade it?
Fear not! I do have a way to do it and I’m going to share it with you!
Speaking of charting and technical analysis…
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One stock that IPO’d in 2017 had some very nice price action and I’ll show you how I played it…
First of all, what’s an IPO?
An IPO is when a private company offers its shares to the public for the first time. This process is often used by growing companies to raise capital to expand.
An IPO is typically a sign of a company’s growth and stability, as it must meet specific regulatory requirements to go public.
My approach to trading IPOs is what I call the “Build-the-Case Method.”
When a company goes public with an IPO, I use a “build-the-case” approach to decide if it’s worth trading.
Because I don’t have any fundamental or technical data to go on, I have to use what is available to me…early valuations, management statements, the attractiveness of the sector, etc.
Let’s look at Roku Inc. (NASDAQ: ROKU).
Take the example of Roku, which issued its IPO on September 27, 2017.
Roku is a pioneer in television streaming. It launched with a $14 per share price, raising $252 million, and was valued at $2 billion. The positive reception was evident as the stock closed high on its first day, exceeding initial market cap expectations.
I knew that web video was hot, so I favored Roku’s entry into the market right from the beginning.
And investors shared my sentiment, driving shares up on the first day. This signaled confidence in Roku’s potential to compete against tech giants like Google (NASDAQ: GOOGL), Apple Inc. (NASDAQ: AAPL), and Amazon.com Inc. (NASDAQ: AMZN).
My charting and technical analysis after the ROKU IPO.
Despite strong fundamentals, I rely heavily on technical analysis…about 80% technicals and 20% fundamentals.
I gave the stock a day and half more of further trading after Day One to establish a pattern I could use.
With only two days of data, charting Roku posed a challenge for me. But, I knew I could use its recent price action and chart patterns to dictate entry and exit points.
Here was my chart at midday on September 29th.
ROKU Intraday Chart; One-Minute Candlesticks; StockstoTrade
The red shows where the trend breaks out. It’s the point where the price at the market open breaks the trend from the previous day. This is called an ascending triangle.
My trading strategy for ROKU.
For Roku, breaking the pre-market highs at the open set a logical entry point at $26.50 (see where the stock broke above resistance in the red circle).
I decided a sensible exit point would be if the stock breaks down to $25…At that point, selling pressure would probably enter the picture.
On the other hand an exit point for profits would be a breakthrough at $30. That would provide a solid risk-to-reward ratio of 3:1, offering a $4.50 reward per $1.50 risk per share.
My key considerations for trading IPOs.
Analyze the Prospectus: This document provides detailed information about the company going public, including financial statements, risk factors, and growth strategies.
Lock-Up Periods: Be aware of the lock-up period, during which insiders and early investors are restricted from selling their shares. Once this period expires, there might be increased volatility as these shareholders may sell their shares.
Demand and Supply: IPO prices can be highly volatile. Initial demand often drives prices up on the first day of trading, but this can be followed by a sharp decline as early investors take profits.
This is why I give the stock a few days to trade, as I did with ROKU, to establish a pattern that I can use to find an entry point.
Market Conditions: General market conditions play a significant role in the performance of an IPO. A bullish market can lead to higher valuations and better performance of new issues, while a bearish market can dampen IPO enthusiasm.
My final thoughts:
Trading IPOs can be rewarding but requires diligent research and careful strategy. 4
By understanding how IPOs trade, analyzing key factors, and implementing a well-constructed trading plan, you can capitalize on the opportunities that IPOs have to offer.
To learn more about my other trading strategies, get access to my stock watchlists, and more, subscribe to StockstoTrade Advisory service.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade
P.S.
Earnings season is upon us, so learning how to interpret and trade on that information is more important now than ever.
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