How To Day Trade IPOs
An Initial Public Offering (IPO) is when the stock of a particular company first begins trading.
In an IPO, a private company sells their stock to the public in order to raise capital to fund their future growth plans.
As IPOs are frequently coming to the market, it's important to stay informed about upcoming IPOs and when they're expected to begin trading.
A good resource for finding out about upcoming IPOs is IPO Scoop.
IPOs present unique opportunities and risks for day traders.
In this article, you'll learn some tips and strategies for successfully day trading IPOs.
IPO Trading Tips The first thing to keep in mind is that as an individual trader, you'll never be able to buy the IPO at the issue price (the price the underwriters have set), which is usually reserved for large institutions.
The IPO may open for trading at, below, or above the issue price.
It's also important to remember that for the first few days an IPO is trading, it's basically impossible for regular traders to short it as there aren't enough shares available to borrow.
Depending on the particular IPO, it can usually take between a few days and a few weeks for enough shares to become available to borrow so that you can short the stock.
Registered market makers, however, are allowed to short sell an IPO as soon as it begins trading.
IPO Trading Strategies IPOs can present excellent opportunities for day traders, especially on their first day of trading.
Most IPOs are very liquid as they attract lots of institutional activity.
There will typically be large displayed orders on both the bid and the offer.
IPOs will also typically have above-average volatility as well.
Here are my two favorite day trading strategies when trading IPOs: 1.
Support One of my favorite IPO trading strategies is to look for support at a key level, very often at a round number ($17.
00, $35.
00, etc.
).
Frequently, underwriters and other institutions will "defend" an IPO at certain key price levels such as the issue price.
Underwriters have an incentive to keep the stock price above the issue price or else it reflects poorly upon them.
Once I see evidence of support at one of those key levels using my tape-reading skills, I'll enter a long trade with a stop just below the support level.
These trades can frequently offer at least a 1:5 risk/reward ratio.
2.
Opening Range Breakouts Another IPO trading strategy I like to employ is an opening range breakout strategy, based off of the first few days of trading in an IPO.
If an IPO breaks out of this opening trading range to make new highs, it very often will have an explosive move to the upside as stop orders trigger and traders pile in.
Keep an eye on recent IPOs that are nearing the tops of their opening ranges for these opportunities.
Conclusion IPOs will often present great opportunities for day traders, and thus should be a key part in your overall day trading strategy.
Although there are some considerations to keep in mind when trading them, IPOs will almost always present excellent risk/reward trades for the skilled day trader.
In fact, some day traders even specialize in IPOs.
If you're looking to try your hand at trading IPOs, my recommendation is to start small so you can learn the intricacies of IPO trading without putting your trading account at risk.
In an IPO, a private company sells their stock to the public in order to raise capital to fund their future growth plans.
As IPOs are frequently coming to the market, it's important to stay informed about upcoming IPOs and when they're expected to begin trading.
A good resource for finding out about upcoming IPOs is IPO Scoop.
IPOs present unique opportunities and risks for day traders.
In this article, you'll learn some tips and strategies for successfully day trading IPOs.
IPO Trading Tips The first thing to keep in mind is that as an individual trader, you'll never be able to buy the IPO at the issue price (the price the underwriters have set), which is usually reserved for large institutions.
The IPO may open for trading at, below, or above the issue price.
It's also important to remember that for the first few days an IPO is trading, it's basically impossible for regular traders to short it as there aren't enough shares available to borrow.
Depending on the particular IPO, it can usually take between a few days and a few weeks for enough shares to become available to borrow so that you can short the stock.
Registered market makers, however, are allowed to short sell an IPO as soon as it begins trading.
IPO Trading Strategies IPOs can present excellent opportunities for day traders, especially on their first day of trading.
Most IPOs are very liquid as they attract lots of institutional activity.
There will typically be large displayed orders on both the bid and the offer.
IPOs will also typically have above-average volatility as well.
Here are my two favorite day trading strategies when trading IPOs: 1.
Support One of my favorite IPO trading strategies is to look for support at a key level, very often at a round number ($17.
00, $35.
00, etc.
).
Frequently, underwriters and other institutions will "defend" an IPO at certain key price levels such as the issue price.
Underwriters have an incentive to keep the stock price above the issue price or else it reflects poorly upon them.
Once I see evidence of support at one of those key levels using my tape-reading skills, I'll enter a long trade with a stop just below the support level.
These trades can frequently offer at least a 1:5 risk/reward ratio.
2.
Opening Range Breakouts Another IPO trading strategy I like to employ is an opening range breakout strategy, based off of the first few days of trading in an IPO.
If an IPO breaks out of this opening trading range to make new highs, it very often will have an explosive move to the upside as stop orders trigger and traders pile in.
Keep an eye on recent IPOs that are nearing the tops of their opening ranges for these opportunities.
Conclusion IPOs will often present great opportunities for day traders, and thus should be a key part in your overall day trading strategy.
Although there are some considerations to keep in mind when trading them, IPOs will almost always present excellent risk/reward trades for the skilled day trader.
In fact, some day traders even specialize in IPOs.
If you're looking to try your hand at trading IPOs, my recommendation is to start small so you can learn the intricacies of IPO trading without putting your trading account at risk.
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