In a recent Market Timing Class in Washington DC, I had a prospective student talk about how they were so excited to buy the Alibaba (BABA) Initial Public Offering (IPO), when it opened. This investor was blinded by the same hype that most retail investors and traders fall into. If you believed the television and internet news surrounding the stock’s release, a person believed that they would have been able to buy the stock at $68 and could see the stock run to $100 on the first day.
This would be an amazing profit for a trader if you actually had the chance to do this. Unfortunately for most novice traders, they do not realize that this is nearly impossible to do. The NYSE did not start trading on BABA until just before noon. The reason for this delay is that the specialists needed to sort out the large imbalance between the stacks of buy and sell orders before the opening of the trading of that stock.
The very first trade was at $92.70, well above the $68 that most investors hoped to buy shares for. Within seven minutes BABA hit its high for the day at $99.70. Two minutes later the price dropped back down near the opening price.
Most retail investors were able to buy but would not have been able to sell until they received confirmation of their buy trade. With the volume of shares traded, it would have been nearly impossible to have made a quick profit. Looking at the price action and volume it appears that many stops were triggered as prices broke down.
Holding onto this “mega IPO” would have been costly too. It traded below and back to its opening price on the first day of trading but has not gotten close to it since. There are a lot of frustrated investors out there and the media has already moved on to other topics.
One of the biggest banking IPO’s ever to hit the US markets also debuted recently. Citizen’s Financial Group (GFG), had been expected to start trading between $23 and $25 a share when it became public. Instead, due to lack of interest, it opened at $21.50. But a trader that took this less hyped IPO actually profited as prices did rise to $23 on the first day.
In a recent Extended Learning Track class, a student commented that BABA may be acting like Facebook (FB) in that it dropped to half its opening price before rising to new highs. It may indeed do the same pattern, only time will tell.
The problem is that you do not know if your IPO is going to be a BABA, FB, or CFG. The Online Trading Academy Core Strategy of trend with supply and demand will work with IPO’s. But since the new stock does not have any history, we do not know how it will react in different market environments and involving your money in them is gambling.
Stocks are a lot like people in that they develop personalities. There are many institutions and market makers trading the same stocks daily. When you identify the personality of the stock, you are more likely to successfully predict its behavior in both bullish and bearish markets.
IPO’s have not developed their personalities yet. Even though supply and demand will work, you will have a higher probability for success on longer time frame trading and investing with an “older” stock. As a general rule, I avoid the newer stocks for any trading other than intraday and will not usually look to trade any stock with less than six months of trading history.
In our courses at Online Trading Academy, we teach our students how to screen for high probability opportunities and filter out stocks that may have too high of a risk to your capital. Learn how to find these and protect your money by joining us at your local center today.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD flirts with daily tops near 1.0730
The continuation of the selling pressure in the Greenback now lends further oxygen to the risk complex, encouraging EUR/USD to revisit the area of daily highs near 1.0730.
USD/JPY looks stable around 156.50 as suspicious intervention lingers
USD/JPY remains well on the defensive in the mid-156.00s albeit off daily lows, as market participants continue to digest the still-unconfirmed FX intervention by the Japanese MoF earlier in the Asian session.
Gold holds steady above $2,330 to start the week
Gold fluctuates in a relatively tight channel above $2,330 on Monday. The benchmark 10-year US Treasury bond yield corrects lower and helps XAU/USD limit its losses ahead of this week's key Fed policy meeting.
Week Ahead: Bitcoin could surprise investors this week Premium
Two main macroeconomic events this week could attempt to sway the crypto markets. Bitcoin (BTC), which showed strength last week, has slipped into a short-term consolidation.
Five Fundamentals for the week: Fed fears, Nonfarm Payrolls, Middle East promise an explosive week Premium
Higher inflation is set to push Fed Chair Powell and his colleagues to a hawkish decision. Nonfarm Payrolls are set to rock markets, but the ISM Services PMI released immediately afterward could steal the show.
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