IPO Stocks Still Show Promise; 2 Rules To Help You Make Long-Term Profits

Sensible Rules for Trading IPO Stocks #

Here are some important rules to consider when trading IPO stocks. Research has shown that these rules can greatly impact trading outcomes.

How Long to Hold IPO Stocks #

When buying shares of a company right after its initial public offering (IPO), it is expected that the stock will immediately increase in price. If the stock does not fall below the entry point and gains at least 5-10% within the first couple of weeks, it is advised to hold onto it for a duration of eight weeks.

After two months, it is recommended to evaluate the chart action and decide whether to collect gains and move on or hold onto the stock for a longer period.

Protecting Gains in IPO Stocks #

One important rule to follow is to never let any gain in IPO stocks, particularly in the 10-30% range or more, turn into a loss. This is referred to as the “round-trip sell rule.” It is important to protect gains and play defensively with portfolio investments.

In some cases, selling a stock that is a 40% winner may result in a psychological setback if it turns into a 7% loss due to the automatic stop-loss sell rule. Salvaging even a small profit can be beneficial, allowing investors to buy back into the market under better conditions.

Case Study: Twilio (TWLO) #

The example of Twilio’s IPO shows the value of following these sell rules. Twilio went public in June 2016, and within a few weeks, the stock price surged by 199% above the IPO price. After a brief correction, Twilio formed a solid base, making it an attractive investment option. Using the high of the chart pattern as a reference, the correct entry point was determined.

Twilio experienced another surge in August, gaining 28% in just a week. The increase in volume indicated the entry of large funds into the stock. Two weeks after the breakout, Twilio retraced slightly but still gained 15% from the breakout point. Four weeks later, it saw a significant 27% jump. Holding onto the stock for eight weeks proved to be a sensible decision.

However, the stock peaked in late September and while reaching a 58% profit, it started declining rapidly. The sharp slide in October wiped out all the progress made in the previous eight weeks. The decline continued, turning a promising investment into a frustrating one.

It is important to note the risks associated with IPO stocks and to have a defensive selling strategy to protect against potential losses.