This year we have had a resurgence of IPOs (Initial public offerings), with several high profile companies going public this year. The questions about IPO stocks have been overwhelming in the past few weeks. One of the most common questions we’ve gotten: Should I trade IPO stocks on day 1? There are more IPOs coming this year, so it pays to study now and figure out if this is a context you can capitalize on or not.
Characteristics of Day 1 IPO Stocks
Before even considering trading an IPO on Day 1, you need to understand how an IPO stock typically behaves right after it starts trading on the open market. They are defined by 3 main characteristics:
- Extreme volatility
- High volume
Anyone who is inexperienced needs to avoid. Day 1 trading is predominantly dominated by algos. Unless you have a back-tested scalping strategy with a positive expectancy, it will be hard for a human to find an edge trading an IPO stock when it starts trading on the open market, especially the first few hours.
Does it Fit Your Gameplan?
If you are a trader that thrives during times of high volatility, by all means, trade as many IPO stocks as you want on day 1. BEFORE placing any trades ask yourself: Do I have an edge in this trading context? For most traders, the answer is no. Don’t be like most traders and buy a day 1 IPO because there are high expectations for the stock on CNBC.
Wait for the Trend to Form
If you’re going to trade an IPO on day 1, give it a few hours to form a trend and consolidate. As you have seen in recent IPO stocks like Uber and Lyft, there is no guarantee that a stock will appreciate in value as soon as it IPOs. Both had significant pullbacks once they started trading on the open market. Expectations about an IPO mean nothing. Saying you know what an IPO will do once it launches is making the assumption you will know what all the insiders and other market participants will do with their capital.
Focus on the Lower Time Frames
I typically day trade with a 5-minute chart, but with IPOs on Day 1 you want to use a 1-minute chart as well. There is so little price history, looking at the higher time frames like the daily chart is pointless. Align patterns on the 1-minute and 5-minute for the highest probability plays.
Use Small Size
All day 1 IPO’s do not have a defined range. There is no price history, so there are few support and resistance levels to halt the stock once it begins a trend. This means that these stocks are almost always highly volatile, which means to trade them you need to have smaller position sizing to avoid getting emotional.
More Edge on Day 2 and Beyond
I recommend most traders wait for Day 2 or later to trade an IPO. The stock will usually need a few days to form a trend and give us an idea of what our bias should be on the name. It is much easier to join an existing trend versus guessing which way the stock trend. Trades on day 1 should just be scalps. Strongly recommend against putting on swing trades on Day 1 IPOs. Here is a recent video recaping some trades we have taken on IPO's recently:
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