Lessons from the Pros


Costly Trading Lessons to Learn

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.

baba ipo

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.

baba break

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.

baba followup

One of the biggest banking IPO’s ever to hit the US markets also debuted recently.  Citizen’s Financial Group (CFG), 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.

fb ipo

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 risky.

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.

Brandon Wendell


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.