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

Are you looking for sensible, carefully considered rules on how to trade IPO stocks? They will make the difference between a so-so result and an outstanding…

return in the long run.

IBD has performed objective research on decades’ worth of IPO stocks, not simply on growth stocks in general. Read on for two key take-aways.

IPO Stocks: How Long To Hold

One, once you buy shares in a company right after its initial public offering, you expect them to immediately go up in price, right? If your timing is correct, the stock should reward you quickly. So, if it doesn’t fall below your entry and gains at least 5% to 10% in the first couple of weeks following a breakout, hold it for eight weeks.

After two months pass, evaluate the chart action. Then decide whether you should collect gains and move on, or hold longer.

If you take the second path, then remember this next rule: Never let any gain in your IPO stocks, especially in the 10% to 30% range or more, turn into a loss.

IBD calls this the round-trip sell rule. Play solid defense with your portfolio. But letting a 40% winner turn into a 7% loss based on the automatic stop-loss sell rule could hurt psychologically. If you can salvage even a sliver of a profit, you’ll be ready to buy back in better market conditions.

Hot IPO Stocks In 2016: Twilio’s Case

Twilio (TWLO) displayed the value of both sell rules among hot IPO stocks after its Nasdaq debut at $15 a share in June 2016. By the week ended July 15, shares bolted 199% above the IPO price. A three-week pause saw TWLO correct just 17% and helped set up a good base for IPO stocks. Take the high of this chart pattern, 44.80, and add a dime for a 44.90 entry.

The innovator in instant mobile and desktop notification platforms surged again on Aug. 11, soaring past 44.90 and well beyond the 5% buy zone in merely a day. By week’s end, TWLO gained 28%. Volume bulged on Aug. 12, 15 and 16. Clearly, big funds rushed in. Two weeks after the breakout, TWLO retreated, yet still gained 15% from the breakout point. Four weeks later? It jumped 27%. Holding for eight full weeks made sense.

Strong Move Up, But An Elevator Down

At the Sept. 28 peak of 70.96, Twilio enriched holders with a 58% profit (1) in 34 days. Marvelous. Taking at least partial profits once TWLO pierced a round number such as 60 or 70 would have been a savvy decision.

The week ended Oct. 14 changed the whole game (2). A 24% slide in massive volume wiped out all eight weeks’ worth of progress. Twilio sliced through its 10-week moving average in heavy volume, triggering another defense-oriented sell rule. This underscored the risk in all…

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