How I Trade IPOS -- The Infants

As a follow-up to my review of "The Lifecycle Trader," I thought I would share how I personally trade IPOs.

Track New Ipos

The first, and arguably most important thing, is to actually track IPOs as the come public. I put each one on a watchlist for that particular year because many will run together.

My favorite Site is Ipo Boutique for IPO research.  which lists IPOs month by month and  year-by-year.  It is a great historical resource, which I've used for my studies.

The IPO Infants  1-8 Months from trade date

IPO infants are very temperamental.  They very rarely make for a successful buy and hold. But they can make incredibly powerful moves.  Better yet, on the whole, the majority will make at least a +30% run, so they give great opportunities.   It's important to treat these like swing trades,  Trim on the rips. 

AAOI was a very tradable infant. - Largely ignored by the crowd vol came in, which gave you a 30% move though the IPO day close and then another move from 13 to 16.  

Another common pattern:

An IPO, that holds its IPO price and then has enough vol. come in to hold a gap, is a great sign of strength 

The "Hype" Fade

It's pretty common for IPOs that are hyped products to fade over the next week or so.  Also, a big opening day trading range is a caution.  But that doesn't mean that the stocks don't show them self for profit opportunities. 

SNAP for example was considered a loser IPO by most,  I did well on it, trading it exclusively on the long side.

It faded hard from the opening, but notice the range contraction right at the 13 days in after it hammered the day before -- That should put it on the watch list. I bought the next day as volume came in but perhaps.  It worked ok.   It then gave another opportunity finding support at the previous level.    I didn't have any confidence to take it in to earnings so I sold the day of and missed the carnage. 

PI:

Like AAOI - held the initial range. So basically the buy signal is range expansion + Vol. 

BE:

Buy signals, narrow range follow pull back then expansion. Vol came in above the average days. 

TME:

One I'm holding now,  the initial Dip could have been bought but wasn't crazy about the vol. at that point.  I waited until it moved above IPO close price and took the position. I got lucky on my trim as it turned out because it looked like it was going to go a lot higher.  Sell in to strength in these. 

QTT:

Volume comes in as price picks up through IPO open and day 2 close. 

The Lifecycle Trade -- Book Review

Alright! I got my copy of the "Lifecycle Trade" How to Win At trading IPos and Super Growth Stocks. As many know, IPOs has been a topic that I have extensively researched. So I was excited to see how the book would compare to my own findings.




Overview.

The book is short--its only about 100 pages but it is a good resource.  It went over 1,679 stocks and categorized them into six categories:

1. Late Bloomer
2. Pump and Dump
3. One- Hit Wonder
4. Rocket Ships
5. Stair Stepper 
6. and Disappointments. 

The books then categorizes the different phases:

IPO - Advance Phase

Institutional Due Diligence

Institutional Advance Phase.

I've  personally talked about the phases as "Infant" and "Toddlers."  Infants can make big runs but they are not sustainable: TLRY  ACIA, SHAK, GPRO. Toddlers make the most epic moves. ESPR, AAXN (TASR) and become true market leaders.. 

Praise & Criticisms

One of the stated goals of the authors of the book was to find the "next Amazon."  I think that misses the point of IPO trading.  An Amazon is a 1 in a 5,000 stock and its not necessarily the best buy point to get it right from the IPO breakout move and ride it forever. -- AMZN had a 90% drawdown from 2000 -2001  The buy/sell rules aren't necessarily that effective for the majority of IPO trades and there is a lot of survivorship basis. Can you ride out a 50% drawdown? I'm not interested in trying.  Also, hundreds of IPOs have either gone belly-up or have gotten bought out. 

The book has some very nice chart examples of the different phases and provides nicely written explanations of the different characteristics of IPOs.  Some of the Stats were particularly interesting 20% of IPOs. Within a year 20% of IPOs will make a 100% run.  While a 100% is a great goal, 80% don't get there so are they worth trading?  My research shows that 80% will make at least a 30%+ run which is pretty easy to identify when it its coming and that, in my opinion, is the advantage of IPOs

 I agree with their conclusion that buying on the IPO day is a not a good strategy. 

Point being, I think you need to have different "trigger" rules for different phases. Until an IPO has gone through a basing pattern or wipeout its not a long term hold.   The institutional Mark they talk about is very real, but it generally occurs past the point where I would call a stock an IPO.  -- and the True Market Leaders will tell you who they are by the volume pattern.   There will be many, many other buy points in a TML that aren't necessarily as what I would call an IPO.

The trade examples and Q and A were very good.  The Authors point out trades they mismanaged as well as ones they got right.  

Recommendation

Buy it. -- its a great little resource to provide a framework for the various stages. 

That said, the book is a good resource but no substitute for going through the charts one-by-one and noting buy points. -- that's the only way to really gain conviction. 

New Year

Let's put it out there right away +19% and change.  Sure, I  "beat" the market but that doesn't say much.

Coming in to this past year, my weakness was not being able to hold my winners long enough. So I set a goal for myself to take on the year with a "home run" mindset:

Regardless of the end result, I feel that approach was critical for my development as a speculator and I've said it at various points this year that I feel that I'm still 3 years away from being very good at this game.

I needed to teach myself what it felt like to be in big winners, what it felt like to manage the trade, what emotions I would deal with along the way, and what the ultimate exit signals would look like.  I also needed to teach myself what it felt like to take a big position and to hold that position, and to get out of that position when I was wrong. Obviously, that's a lot to learn and at times, I got it right, and at times I got it very wrong.

So the good:

I hit some big trades:
AAXN:

NFLX: Between my positions made about 70 points

MDB:

The Bad:

My worst stock of the year.  This was a culmination of many attempts to get  pull back entry (with size). The most disgusting part about this stock, was I started off with a huge profit.  Within 3 days, the calls I bought for $2 were trading for $15. 

What I failed to realize was this was the blow off to the upside. Instead I was convinced that it would resume on the uptrend after pulling back to the 10 ema.   So I was adding shares and size.  Ultimately not only did I give back the entirety of my options gains, I through big losses on the 3 or 4 times I tried to enter on common stock.

TWTR:

I was in early, and first entry worked but didn't give the cushion for earnings.  OF course, it gaps and I got fomo and bought with size and got my butt kicked.  

HEAR:
Another one multiple attempts, my time was never good enough:
I knew this would be a big winner, and I constantly stalked it but my timing was off (or at least stops and position size.  Got knocked out with interlay reversals.

The UGLY

The Ugly had to be my equity curve through out the year.

At times I had massive surges in very short periods. But the backside was awful.   The last quarter was ugly for several reasons.

First, I was right on the market, I suspected when we were putting a top in during October and even moved all my stops up into the gap. 

How can I be so right:

I saw the signal, moved my stops up to the gap-- yeah I gave up some profits but that's the cost of doing business. 

I went to cash

Recognized the start of the bear

And still got my butt kicked.

The problem was I didn't realize that the character of the market had changed, and I was trying to trade the way I did at the beginning of the year, where I would get into positions, get big gains, and ride the trend.

The buy signals in Q4 were pretty much the same as the rest of the year and they worked. 

My problem; however, was after a massive rally -- and notice that throughout Q4 I had big spikes in my equity only to give up more over the next sessions.-- was that the character of the market had totally changed and I was still trying to trade the same way as I did in May.

I had several massive up days only to be holding a lot of stock and then have the market turn on me the next giving back all those gains and more. 



Lesson No. 1.
Holdable Trends arise out of low volatility environments.  The buying pressure is heavily in favor of the bulls so volatility dries up.

Lesson No 2
After an extended rally and the market gaps up.  Sell into it or raise stops.  Sell into quick spikes-- they will need a lot of time to re-set-- look at DBX chart


Lesson No. 3 - Recognize character change.  When the market goes from calm and orderly markup to wild distribution don't expect to hold for the big trade.  Recognize the situation,Volatility is character change of the market.  I must shorten my swing and profit goals. 

Lesson No. 4
When market volatility returns.  Sell into spikes hard and  don't rush to get back in.

2019 trade goals:

1.Situational Awareness -- expect chop, rising interest rates will have an effect on corporate earnings, political environment etc...  Don't marry a position, don't marry an opinion.

2. Recognize opportunity - don't fall asleep at the wheel, there will be sectors and stocks that do well -- watch them - but you don't have to be the first in the water.

3. Manage risk,  -- get your position sizes right.

4. Manage emotions: Fomo No mo'