The Nasty Truth About Trading Popular IPO’s Such As Facebook

Trading very popular IPOs such as Facebook and Twitter can be very dangerous if you do not know what you are doing.

In this video, I’m going to talk about the nasty truth about trading popular IPO’s.

  • I will talk about why IPOs are dangerous to trade.
  • I will show you the nasty clues behind an IPO’s debut.
  • I will explain to you how to handle an IPO.
  • I will explain why I believe most IPOs are a gamble.
  • I’m them atop a little bit about why IPOs should not be a part of your investment portfolio.
  • I will clearly show you why IPOs are not good for short-term trading.

I will cover a whole lot more and have lots of fun also!

I was invited to speak in front of over 50 active traders in Texas and this video is a recording of that presentation in which I spoke about IPOs.

Let me know what your thoughts are about trading and investing in IPOs in the comment section below.

facebook ipo 2

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Tai Zen:  We’re getting a lot of questions about the IPO on Facebook that happened in the last week.

I put the nasty truth here about Facebook’s IPO and it’s not just the nasty truth about Facebook’s IPO but any IPO that comes out especially if it has a lot of fanfare, there’s a lot of celebration and just a lot of media exposure with the IPO.

The more exposure, the more hype and the more bells and whistles that you see on the financial news channels and everywhere – when the janitor at your company is talking about investing in Facebook, something’s wrong.

In this presentation, I want to cover some of the nasty truths behind it. I’m going to show you guys the facts, it’s not just opinions but these are the facts behind the IPO’s release.

I’m going to go over the nasty truth about Facebook’s IPO and why trading an IPO is extremely risky. In today’s discussion topics I’m going to cover why IPOs are dangerous, the nasty clues behind an IPO debut, how to handle and IPO, why IPOs are a gamble, why IPO should not be a part of your investment portfolio, why IPOs are not good for short term trading and a whole lot more and we’re going to have lots of fun while we do it. You know how trading is sometimes boring and sometimes tough so I’m going to try to make this as fun and as exciting as we can today.

Here are some of the things that we’re not going to cover today. I’m not going to cover the exact nature, the infrastructure behind the IPO itself. In other words, the underwriting that goes behind it, how Facebook or companies take themselves public; that’s now what I’m going to cover today because I believe that that’s not going to help you make money.

The things that I’m going to help you today, cover today in today’s topics are things that can help you make money or prevent you from losing money. I’m more of a tactical type of trader so I like to help people just get right down to the nitty-gritty.

If you guys have any questions, just stop me and holler or say something and stop me.

Here is a screenshot of Facebook’s IPO on Friday the 18th. They decided to release their IPO. Notice how it started way up here and crashed down to here, bounced back up and came back down again and then later on it came back up again.

To the untrained eye and to the public, everybody thinks that this is a great investment.

If you ask anybody, the street bums, the guys that live under the bridges here in Dallas, they’ll tell you it’s a great idea!

Let’s see a show of hands, how many of you guys had a friend, a relative or a co-worker suggest that you look into buying Facebook? Just raise your hands. Okay, interesting. How many of you guys considered in your own mind maybe looking into investing into or trading Facebook? How many of you guys thought that it was best to just leave it alone?

No History Of Support
& Resistance Is Risky

What are some of the evidence that you guys have to leave it alone other than the fact it’s an IPO?

Is it too much hype?

The reason why I’ll leave it alone is there is no history.

There is no history of support and resistance. There’s no history of where people buy and sell this stuff.

I was being flooded by all my friends on Facebook, all of my friends that know that I trade called me up, emailed me or text me to not forget about buying Facebook when it was released.

These people never once contacted me when the Euro dropped a hundred points or the Dow dropped a hundred points but everybody decided to call me when Facebook came out.

What they don’t understand is this…

They don’t understand the truth behind it. I took a screenshot of my account and I’m going to show you something nasty.  A nasty truth about what happened that day when Facebook got released.

Whether you decide to trade or decided not to trade that day, or decided to invest in it or not invest in it, these clues here will really peel your eyes backwards and reveal the truth to you about what happened.

Let’s look first at the overall big picture. I got a bunch of notes on the screenshot but just bear with me here and I’ll go through it one more time.

The Glitches In
Trading An IPO

First of all here, we’re looking at Facebook on the Tradestation platform. I don’t think it’s any different if you use any other direct access trading platform; you’ll probably see very similar data so any malfunctions or data issues on Tradestation, I do not believe that is just related to Tradestation only.

There were some glitches when the market opened for Facebook. I think it’s across the board and not just one particular broker.

There was just so much volume. There were over five hundred million shares that were being traded that day. The servers can only handle so much at such a short period of time.

Aside from the technical issues, that’s bound to happen so there’s only so much you can blame on the broker. Let’s just look at the actual, the underlying of what goes on.

The interesting thing is they got two symbols, two characters instead of four like the standard Nasdaq symbols. I don’t know how they finagled that one in, but they’ve got it so it’s FB for Facebook.

We’re looking at a fifteen-minute chart here. It’s kind of hard to tell from the screen here because I forgot to darken it, but you see that dotted line running down here, that represents one day. Here’s another dotted line here that represents one day and here’s another dotted line here which represents the next day.

Here’s the first day of trading. If you look on the Friday, the first day of their opening on the IPO, we notice that Facebook, it shows on the chart that it went up to forty-five dollars and somewhere around there and then to forty-three dollars. They said they opened at $42 but at some point it went up to forty-five dollars. The evaluation on it was at $38.

I just want to make it clear, guys. I was sitting there watching it and trying to trade at that time because I wanted to record it and show everyone the truth about trading an IPO when it first comes out.

The opening price is around $42; between $42 and forty-five dollars, guess how many shares were traded right there?

It’s not much of a guess, I put it right here.

Nasty Clue #1:
Facebook’s IPO Had Very
Suspicious Trading Volume

The nasty clue number one here is that we see that less than a thousand shares were traded between the price of $42 and $45 out of 550 million plus shares that was traded on the first day of trading.

Think about that…

There was a huge three-dollar span between $42 and $45 and only less than a thousand shares were traded. How is that possible?

 

INSERT IMAGE

 

Who own the rest of the shares? Marc Zuckerberg?

Let’s not focus on who owns what; let’s just focus on how the shares were traded. Who owns what is not going to put money in your pocket or prevent you from losing money. Let’s focus on how it was traded.

There was a technical issue or technical glitch or somebody playing some down and dirty trading tactics and put those – actually it was like a hundred and fifty shares that was traded at $45.

Student:  Even thought there was a glitch, if I wanted to buy the share at fifty dollars, I’m going to get to feel that fifty dollars, right?

Tai:  If there’s nobody selling it at fifty dollars, you can’t buy it. Plus, you have to buy it within the national best bid on offer.

Student:  But the day of the opening, the underwriter will sell me at fifty dollars. If I wanted to buy that share at a thousand dollars, I get filled real quick.

Tai:  It sounds good in theory but when you go out there and try to buy it – this is the current price of the stock. It’s illegal for you to jump way out here and buy it way up here.

Student:  Ah, okay. That’s illegal?

Tai:  That’s illegal. Let’s put it this way; you don’t have the technology at home to do it. Whether it’s legal or illegal, you don’t have the technology at home. If the current price is right here, the bid is here and the ask is here, whatever the current bid and ask is, by law you have to buy it within the NBBO which is the inside price which is the wholesale price which is the current price.

Student:  But we know that there’s technology available that can let you buy a little bit of that.

Tai:  Yes. If the current price is right here, is there technology available to where you can jump ahead of everybody and buy up here or sell down here? The answer is yes.

Student:  Why would you want to?

Tai:  I don’t want to get too far off track, but I’m going to answer that for you guys.

The reason why somebody, the current price is here and somebody would want to buy five or ten cents above it is if somebody is buying ten thousand shares or five thousand shares – a large volume – they don’t want to risk the slippage.

They would rather go ahead and pay two or three cents extra and get their entire or they fail that one time. Or if you guys have a big, huge account like hundreds of millions of dollars, you can go out there and have your orders set above it and you can actually shake people out.

I don’t want to get too far advanced into that. The reason why is because I can talk about it but you don’t have the technology or the account size at home to do it. It’s irrelevant to us individual traders at home

Student:  If you wanted a hundred shares that day, you should have just gone in at the bid.

Tai:  Yeah. If it opens up at $42 and you’re only buying or selling a hundred or two hundred  – you’re an individual, at-home trader – you’re going to buy around this level right here. You’re not going to have the ability or the technology or the money to jump way out here and buy it or sell it way up here. Are we very clear on that? Go home and try it, it’s not going to let you.

You can place a limit order up there so that when price gets up there you can buy it or sell it but not just run out there and just buy it at the market at that current price or that limit price.

They used to be able to do that. They used to during the heydays of the 90s; you could do that and it’s called buying or selling out of the current price. There are ways to do that but now it’s really difficult.

Let’s get back to here. If there was only less than a thousand shares traded between these two price levels right here, what does that tell you?

That’s not real.

Whenever you hear the news and somebody said that, “Facebook just dropped 10% or 15%” or “It’s up 20%” the truth is, less than a thousand shares were traded there. You could not have gotten filled on a buy or sell order in that area.

Saying that the price went up 10% or 20% or whatever is completely irrelevant to you because you would not have had the ability to trade it at home.

Is everybody clear on that?

Nasty Clue #2:
Facebook’s IPO Price
Was “Propped Up”
By The Underwriters

Not let’s take a look down here, the nasty clue number two. Nasty clue number two is that over 550 million shares were traded at $38 and $38.01 which clearly shows that the underwriters were trying to prop up price and keep it at $38 to make the IPO look rosy and pretty.

But if you know what you’re looking for – let’s go back in history to the day the IPO was released.

 

INSERT IMAGE OF MATRIX

 

Right here is kind of blurry, guys, and you may not be able to be see it in the slide.

This right here in the yellow is $38 and the price right above it is $38.01.

You’re not going to be able to see from there but right here on my screen it shows two hundred and thirty-four million shares traded right there at $38 and 222 million shares were traded at $38.01. The math, just a rough estimate, that’s 456 million shares that were traded at those two price levels.

Notice  how, at the rest of the price levels here, hardly anything was traded except the bulk of it was right there. Can you guys clearly see that?

Even thought they said that Facebook shot up all through here and everything, the reality of it was everything was traded right there at the bottom right there.

Because it would really hurt them if they let price fall below this – below that $38 dollar price right there – it would really hurt underwriters and everybody. It would benefit them to keep it at that price and they made a ton of money by keeping it at that price.

Three days later in the newspaper, it said that Morgan Stanley, the lead underwriter for this, they made over a $100 million dollars that day. I’m not going to go into the details about how they went about doing that by keeping price there that they made a $100 million dollars.

The reason is because none of us can do it. It’s irrelevant to talk about it.

Nasty Clue #3:
Facebook’s IPO Had
Very Suspicious
Trading Volume

Let’s talk about the nasty clue number three.

I tried to see what it was like to buy a very, very high-demand, very popular IPO the day it opened. I logged in to my live account and I bought 10 shares right here on this red candle as it was falling. I actually bought it right somewhere there. I was looking to see, maybe it will take profits and pull up.

What happens is, I bought it right there at the top of that red candle and it bled all the way down here to $38 and it bounced back up.

Keep in mind I had a $0.15 stop loss on there when I submitted the order and it never got filled. It never got filled and I was down two dollars. Keep in mind I put in a $0.15 stop loss so I was willing to take $0.15 loss on it but the platform never filled me because there was never shares for me to get filled. This is only 10 shares, folks. It came all the way down to here, bounced off at $38 and then on this green candle, as the price was shooting up, the green candle represents that everybody is buying. At that point, that’s when I got filled for my 10 shares and I was down like a -$1.50 even though I had a $0.15 stop loss.

It sounds really good and dandy, but there were several hundred million shares traded.

The truth is, you wouldn’t have gotten filled.

The other truth is that on an IPO, I think that by law you’re not supposed to be able to short it within the 30 days to give the IPO, the company, a chance to survive.

During that time, I was not shorting it I was just trying to sell and get out of my long position but it would not fill. I ended up losing almost a d-$1.50 per share.

Lucky I was only doing it with 10 shares and not 100 or 1,000 shares or else I would have taken a nasty bleeding on that.

That’s a valuable lesson for you guys there. Always trade a small share size if you are not sure.

Anytime you want to try something new, guess what?

Do it with 10 shares because when everything goes wrong, you can still afford the loss.

At least I did it and I can sit here and tell you guys that it was nasty.

I couldn’t get filled, I ended up having to call the brokers – the Trade Desk – and tell them to close out my position.

I tried every which way I could think of to close out the position and it just wouldn’t close. When I finally called up my Tradestation broker, the Trade Desk, the customer service rep, he told me, “Just wait a minute.”

I was like, “Wait for what?” It’s only 10 shares. There are millions of shares being traded, how come I didn’t get filled? He was like, “We don’t have no shares to fill it.”

Student:  There were no buyers?

Tai:  I was trying to buy it to get out and there was nobody selling it.

It finally turned green in the middle of the conversation, I was pissed off.

I was like, “What do you mean you can’t fill 10 shares?”

He was like, “Go ahead and try to get out now” because the candle was green.

I hit close and it exited out my trade for me. He confirmed for me that I was out.

There were a lot of people that put in buy and sell orders that did not get filled and guess what?

Two days later they get an email statement from the broker saying that their orders got filled!

The people went home thinking that there orders never got filled.

There are a bunch of losses going on about this. The brokers didn’t fill people’s orders. That’s another thing. I was lucky I got mine filled even though it had a -$1.50 loss.

Nasty Clue #4:
A -26% Loss In 3 Days?

Now let’s take a look at nasty clue number four.

If you bought Facebook at the open at $42, look at this long red arrow.

If you bought it at the opener at $42 on the day that it was released, you lost 26% in 3 days.

26% from $42, down to $38.

I’m not going to say anything above that because your orders would not have gotten filled up here so I’m just going to use where your orders might have gotten filled. How would you guys have liked a -26% loss in 3 days?

If you’re not shorting that would be beautiful, wouldn’t it?

But you couldn’t short.

If you want to buy Facebook at valuation price, at the $38 dollar valuation price at this thick blue line, then you would have only lost minus -18% in 3 days.

How do you like that?

Only if I could have shorted that day, but I couldn’t.

It’s pretty much self explanatory, right?

The charts don’t lie, guys.

Anybody can say whatever they want on the news, on Bloomberg, on CNBC, on the squat box.

The Mad Man (Jim Cramer) can rant and rave but the charts don’t lie because the chart is a footprint of what was actually bought and sold.

Bonus Nasty Clue
Amateur Traders Like
To Buy & Sell At
Whole Even Numbers

I wanted to throw in a bonus nasty clue for you guys.

In the corner right here, this is bonus material. Check out the obvious amateur entry points.

Bonus nasty clue here reveals – this is how the trader psychology, you should look into this – notice on the matrix price ladder on Tradestation…

They call it the Matrix but the technical term for it is the price ladder because the price goes vertically up and down.

Notice that price was traded at $32 at the time I took this screenshot.

It was the first trading day for Facebook.

Notice how at $32, there were 36 million shares traded and only 45 million shares have been traded today and out of that, 46 million occurred at the $32 price level.

What does that tell you? Just spell the answers out, guys. Just scream it out.

Student:  Amateur hours?

Tai:  Amateur hour? What else?

Student:  People like Facebook?

Tai:  Okay. What else?

This lets you know that the average person, when they’re buying Facebook or any kind of stock, they don’t put orders in at $35.05 or $31.97.

They tend to put it at whole, even, round numbers.

If you guys are putting your orders or your stop losses at whole even round numbers, then guess what?

There’s a higher probability that you might get shaken out and beat yourself upside the head and stomp the floor, punch the wall, beat your forehead against the sheet rock wall at your house.

Hopefully sheet rock wall and not brick anyway… lol.

You’re bleeding profusely in the forehead and you wonder why you keep getting shaken out.

Here’s a classic example of why, guys.

Look at these 2 arrows. I put a question there.  Is the 2 cent breakout really an accident?

Notice how on the second day of trading Facebook fell all the way down to a low of $32.98, which is 2 cents below $33.

In the next day, it got down some more and fell 2 cents below $31 and hit $30.98, which is 2 cents below the whole number.

Do you think that that is an accident?

Do you think that’s an accident or do you think that the institution – the big boys – know that the average person, the average amateur Joe Lunch Bucket is going to buy at those whole even round numbers?

Here is how amateurs think… “Since Facebook fell, I couldn’t get it at $38. I think it’s a great deal at $32 or $33.”

I put my buy order right there or maybe put my stop losses right underneath it. We know that they do this.

So pay attention to the stock that you trade.

I’m not saying that this happens to every stock or every currency or every future contract. But pay attention to how far it pokes below, how well it pokes through and make sure that you set your stop accordingly.

How To Avoid
A Shakeout

If you trade Facebook like five or six months from now and you’re trading Facebook constantly and you notice that they always poke below 2 cents or 3 cents below the whole even numbers, you might want to set your stop a few ticks away from that so you won’t get shaken out.

That’s on the stop loss.

What about on the profit side?

On the profit side, let’s say that you had a plan to take profits at $31.90 or $31.95. We know that $32 is prime target for institutions to shake people out.

We might want to get filled for our profit right there because we know the high probability it’s going to get filled. It works on both sides, just make sure you use it correctly.

That’s my bonus nasty clue. Anybody have any questions about that? About what we went over and why it’s not safe to trade an IPO?

Student:  When would you do this? Would you do this a year from now so that you have a whole year?

Tai:  That’s a good question! That segways us into our next slide – how to properly trade an IPO.

I’m going to answer that for you.

How To Properly
Trade An IPO

First, let the “dust” (hype and enthusiasm) settle.

When I say the dust settle, what does that mean?

That means that let all the fanfare, let all the hype, let all the commotion, let the janitor finish spouting investments facts about Facebook while he’s cleaning the toilet at your company then you can start considering to trade.

The next thing is don’t be lead to the slaughterhouse, folks! Just don’t.

I know what I’m doing and I got hit with a -$1.50 loss on 10 shares!

Imagine you came in there with 1,000 or 2,000 shares and thought that this might be a good investment grade material. You’re only going to get a butt-whipping!

Just to answer you guys, also, trading is about consistency it’s not about a gamble.

If you come and you tell me that, “Tai, I’ve been making a $100 a day every other day for the last 60 weeks.”

I would look at you and pat you on the back and know that you are an awesome, awesome trader.

However, if you come and you tell me you made $10,000 on a trade, the first thing I’m going to ask you is, “What size account and how often have you done that?”

If that’s only happened once in your lifetime, you’re in trouble.

Remember guys, trading is about consistency.

When you talk about trading for a living, if you need $3,000 a month to cover your bills and your expenses so you don’t have to show up for work from 9 to 5 every day or you need to cover a $5,000 expense each month or a $10,000 expense each month, you’re trading to cover that.

No one has ever come to me and said, “I want to trade and become a millionaire.”

However, when they go home and trade, the only thing they can think of is become a millionaire from their trading. It’s not that, folks. It’s trading to generate that consistent income that will give you the option to leave your job if you wanted.

Some of you guys have great jobs and you might not want to leave your jobs.

I feel like I got a great job; I get to make money in the market and help other people do the same thing. I was doing it for free for two years before I was recruited to become a trader coach. I like doing it.

What If An IPO Goes
To The Moon And You
Missed The Opportunity?

What if the IPO shoots to the moon?

I get that question all the time from students.

What happens if it shoots to the moon, Tai?

Great!

When it does, let me know and for less than ten bucks I’ll jump on it.

How much is commissions?

How much are you guys paying for commissions? Five dollars? Seven dollars?

I know it’s less than ten dollars.

I don’t think any of you guys pay more than ten bucks for commission.

If it goes to the moon, great!

Let me know and when that happens, for less than ten dollars I’ll jump on the trade. Do you guys agree?

I’m not going to stop what I’m doing and make my couple hundred dollars every day in the market to go over there and gamble for a thousand or two thousand dollars.

Really think about this, guys.

On your account size, some of you guys trade with a $5,000 account; some of you guys trade with a $10,000, $30,000, $50,000, $100,000 account.

I don’t think any of you guys – I might be stereotyping. Stereotyping is always fun because most of the times it’s wrong.

I doubt some of you guys are trading at $5 or $10 million dollar accounts in here.

If you’re trading in the small, five, ten, twenty, hundred thousand dollar account, is it really worth it for you to stop what you’re doing and jump over here to Facebook and try to make a thousand or two thousand bucks.

How much do you think you’re going to make?

I’m not. I’m going to stick with my game plan and that’s the next bullet point here.

Stick To Your
Trading Plan

Don’t be dazzled by the bells, whistles, new shiny objects, the chrome plating on the bumpers.

Don’t get fascinated with that because that doesn’t pay your bills each month.

Would you guys rather learn how to make $10,000 on one trade and only do it once a year or would you guys rather learn how to be consistent and make that $100 a day to $200 a day so you can pay your bills each month?

Raise your hand if you want the consistency, guys.

Look at that, everybody raising hands.

Wait a minute – I know you didn’t. I know you guys didn’t sit there thinking ‘I’d rather go for $10,000 a chunk.’

Tell me you didn’t, you just didn’t hear what I said or something.

You’re just passive?

Raise your hand anyway!

You see that, guys?

Everybody in the room just raised their hands and said they would prefer consistency over a huge gamble.

Thanks for your cooperation there.

When Is It Ideal
To Trade An IPO?

Tai:  Okay, folks! Any final questions on trading an IPO?

Student:  When can you short an IPO?

After 30 days.

What I would do here folks is this, I would wait until there was a historical support and resistance level.

This is a $40 stock.

Do you think that this is the only $40 stock out there that you can trade?

There’s a bunch more out here.

Why would you go and trade the most dangerous stocks and have no clue of where it’s going or what’s happening with it?

There’s no historical evidence. There’s no footprint of where prices are going to turn.

Student:  It’s fresh and shiny!

Tai:  Yeah! This is the popular kid in the high school and everybody wants to be his friend. Who cares.

That’s not going to pay your bills. If you’re lucky, you might make some money.

But if you’re unlucky like me and you took a -$1.50 hit on it, that can be a disaster for your account.

Lucky, the ten-share trade wasn’t a huge hit to my account.

But some of you guys, if you lay everything on the line, that could be your whole savings right there.

Student:  I’m just surprised to see something that had a lot of hype there and so many people got hurt.

Tai:  Yeah. You’re surprised that it happens over and over, right?

Student:  Yeah.

Tai:  When I was working downtown at the clubs in the city of Austin.

I was daytrading in 2008, I was working at the clubs as a promoter and bouncer at night in downtown Austin in the club district. It’s packed! It’s packed like sardines Thursdays, Fridays and Saturdays.

If you’re a single individual, Austin has got to be the best place for single people and they’ve been voted best place for single people many years in a row.

They would literally have busloads – I’m talking about busloads of people that go to University of Texas Longhorn and they would ferry students from their college dorms and they would drive them down to the downtown club district and just release them.

They would open the flood gates and there was just kids. Fraternities, sororities, kids, colleges flooding the street and it was like shoulder to shoulder there every weekend.

If you’re single and you’re listening to this, just go there. If you want to meet other singles, that’s one of the best places to meet. I know this is not trading, you guys are laughing.

But I brought this up because there will always be some douchebag down there – literally – that would fire off a gun and guess what happens when they fire off a gun in the middle of thousands of people?

Guess what the first thing that everybody does is?

They run back and dodge and they trample whoever is in front of them.

Think about this, guys.

We’re civilized beings and the majority of kids go to a prestigious university – University of Texas Longhorn at Austin, one of the most prestigious universities in the country – these guys are smart.

They’re not dumb or else they wouldn’t be in the school, right?

But guess what happens every time when somebody fires off a gun down there?

They scatter, they trample and they just run over each other and there’s always somebody that’s hurt.

That’s why they have two police stations down there; did you guys know that?

They set up two police stations two blocks apart literally and park six police cars. They got the bus there to round people up when necessary. What is it called?

Student:  Paddy wagon.

Tai:  Yeah, the paddy wagon. I was thinking chuck wagon. It’s the paddy wagon. They would literally just round people up whenever something like this happens.

The reason why I brought this story about why people get trampled over and ran over is going back to what you said.

It’s amazing how every time the media spits all these nonsense, everybody runs out there and buys it because it’s human nature.

It’s human nature.

If I throw my hand in your face and flick my finger on your face, you will flinch and they know that.

The big boys know that they make a move, the public will flinch and move in a certain direction.

That’s how it works, folks!

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