The opening bell rings, but not for the whole market. All eyes are on one ticker. The new, highly-anticipated Initial Public Offering (IPO). The price quotes are wild, the volume is massive, and the financial news anchors can barely contain their excitement.
For most traders, this is a recipe for disaster. They see the initial, violent pop and are instantly gripped by the Fear of Missing Out (FOMO). They jump in, chasing a stock with no history, no established levels, and no plan. More often than not, they get crushed.
Our team has seen it happen countless times. But here’s the secret: the chaos of an IPO isn’t just a risk; it’s a massive opportunity if you have a repeatable, rules-based plan. It’s time to stop gambling and start trading.
Why IPOs are a Different Beast (And Why That’s an Opportunity)
Trading an IPO on its first day is unlike trading anything else. You have to throw out some of your standard tools. Why?
- No Past Data: There are no previous support and resistance levels, no moving averages to lean on, no historical chart patterns. You’re flying blind… unless you know how to read the real-time story of price.
- Pure Price Discovery: The first few minutes (and hours) are a raw battle between the initial institutional investors, the underwriters, and the flood of retail traders. The market is trying to figure out what this new stock is actually worth.
- Extreme Volatility: Because of this price discovery process, the spreads can be wide and the price swings can be violent. This extreme volatility requires specific adjustments, much like those needed for trading in a high VIX market .
This environment terrifies unprepared traders. But for us, it creates the perfect setup for a strategy designed to capitalize on the emergence of order from chaos.
The IPO Opening Range Breakout (ORB): Our Go-To Strategy
This isn’t a complicated strategy. In fact, its simplicity is its strength. The core idea is to let the initial chaos subside and allow the market to establish a temporary consensus on value. We then trade the breakout from that range.
The principles are the same as those in our playbook for trading the market open , but adapted for the unique conditions of an IPO.
The Core Concept: Letting the Market Show Its Hand
Instead of guessing where the stock will go, we wait. We let the buyers and sellers fight it out for the first 5, 10, or 15 minutes. This initial battle creates a clear, defined high and low price.
This range is our field of play.
- The high of the range acts as initial resistance.
- The low of the range acts as initial support.
A decisive break above that high tells us the buyers have won the first battle and are in control. A break below the low tells us the sellers are winning. We simply wait for the signal and join the winning team.
Our Step-by-Step IPO ORB Playbook
Here is the exact, rules-based process our traders follow.
Step 1: The Pre-Trade Checklist (The Night Before) Before the market even opens, do your homework. What’s the IPO price? Is there a lot of media hype? What’s the sentiment? You’re not looking for a reason to buy or sell, you’re building context for the potential volatility.
Step 2: The Waiting Game (The First 5-15 Minutes) This is the hardest part for most traders. You must do nothing. An IPO rarely starts trading at exactly 9:30 AM EST. Whenever it officially opens, you start a timer for a set period—we prefer 15 minutes to let more of the initial frenzy die down. During this time, you simply mark the highest price and the lowest price reached. That’s your opening range.
Step 3: The Entry Trigger (The Breakout) Your entry is simple and objective.
- For a long trade: Enter when the price breaks and holds above the opening range high.
- For a short trade: Enter when the price breaks and holds below the opening range low. (Note: Shorting IPOs can be difficult due to borrow availability).
We look for a strong candle close outside the range as confirmation. Don’t just jump on the first tick that breaks the line.
Step 4: The Stop Loss (Your Built-In Protection) Trading without a stop-loss order on an IPO is financial suicide. Your stop loss is placed based on the range you identified.
- For a long trade: Place your stop below the midpoint of the opening range. This offers a tighter risk profile. For a wider, safer stop, place it just below the opening range low.
- For a short trade: Place your stop above the midpoint of the opening range (or above the range high for a wider stop).
Step 5: The Profit Targets (Getting Paid) We use a risk-multiple approach. Before you enter, calculate the distance between your entry price and your stop-loss. This is your “1R” (1 unit of risk).
- Target 1: Take some profits at 2R (a reward twice the size of your risk).
- Target 2: Take more profits at 3R.
- Trailer: You can let a final small portion of your position run with a trailing stop to catch a true momentum move.
This entire process must be clearly defined in your personal trading plan before you ever risk a dollar.
Real Trading Simulation: Trading the Reddit (RDDT) IPO
Let’s apply this playbook to a real, recent example: the highly-publicized IPO of Reddit (RDDT) on March 21, 2024.
- Context: RDDT priced its IPO at $34 per share. Due to high demand, it opened for trading at $47.
- The Open: The stock officially began trading around 12:20 PM ET. We start our 15-minute timer.
Step 1 & 2: Identify the Opening Range (12:20 – 12:35 PM ET)
- In the first 15 minutes, RDDT established a clear range.
- Opening Range High: ~$50.40
- Opening Range Low: ~$47.00
Step 3: The Entry Trigger
- Shortly after 12:35 PM ET, RDDT broke decisively above the $50.40 high.
- Our Entry: Long @ $50.50 as it cleared the range.
Step 4: The Stop Loss & Risk Calculation
- The range is $3.40 wide ($50.40 – $47.00). The midpoint is around $48.70.
- Our Stop Loss: We place our stop just below the midpoint at $48.65.
- Risk per Share (1R): $50.50 (Entry) – $48.65 (Stop) = $1.85
- Now, we apply our position sizing strategy . If we have a $30,000 account and risk 1% ($300), our share size would be $300 / $1.85 = 162 shares.
Step 5: The Profit Targets
- Target 1 (2R): $50.50 + (2 * $1.85) = $50.50 + $3.70 = $54.20
- Target 2 (3R): $50.50 + (3 * $1.85) = $50.50 + $5.55 = $56.05
The Result: RDDT rocketed higher after the breakout, hitting a high of $57.80 that day. Our 2R and 3R targets were both hit within the next hour, resulting in a successful, well-managed trade. We didn’t have to guess, chase, or panic. We just followed the plan.
Beyond Day One: Trading the IPO Base
The action doesn’t stop after the first day. After the initial IPO frenzy, a stock will often settle into a consolidation pattern over several days or weeks. This is known as the “IPO base.”
This base acts just like the opening range, but on a larger timeframe. We can apply the same breakout logic:
- Identify the Range: Mark the highs and lows of the multi-day consolidation.
- Watch for Volume: A breakout from this base should ideally occur on higher-than-average volume.
- Trade the Breakout: Enter as the price breaks out of the base, with a stop loss set within the consolidation structure.
This is a powerful setup because it signals that the stock is ready for its next major leg up after absorbing all the initial sellers.
Critical Risks to Manage When Trading IPOs
Our team has a simple rule: if you don’t respect the risk of an IPO, the market will take your money. It’s that simple. You must be disciplined.
- Extreme Volatility & Spreads: The bid-ask spread on an IPO can be much wider than on a normal stock. This means your slippage (the difference between where you want to get in and where you actually do) can be higher. Use limit orders to control your entry price.
- The IPO Lock-Up Period Explained: For a set period after the IPO (typically 90 to 180 days), company insiders and early investors are “locked up” and cannot sell their shares. When this period expires, a large number of new shares can flood the market, potentially putting significant downward pressure on the price. Always know the lock-up expiration date.
- The Allure of FOMO: The hype is the biggest psychological trap. You will feel an intense urge to chase the stock as it’s running. This is where your written trading plan and your discipline become your most valuable assets. Stick to the ORB strategy and only trade your defined entry triggers.
Your Blueprint for Trading IPOs
Trading an Initial Public Offering doesn’t have to be a gamble. By ignoring the hype and focusing on a simple, objective strategy like the IPO Opening Range Breakout, you can turn one of the market’s most chaotic events into a structured opportunity.
Let the market show its hand, wait for your entry, define your risk, and know your targets. That is the playbook for trading IPOs like a professional.
Frequently Asked Questions About Trading IPOs
Can you day trade an IPO on the first day?
Yes, you can absolutely day trade an IPO on its first day of trading.
Day trading an IPO is possible once it begins trading on the exchange. However, it requires a specific strategy, like the Opening Range Breakout, and strict risk management due to the extreme volatility and lack of historical price data.
Key Takeaway: You can day trade an IPO, but you must have a pre-defined plan to manage the unique risks involved.
What is the best strategy for trading IPOs?
The Opening Range Breakout (ORB) is one of the most effective and popular day trading strategies for IPOs.
The ORB strategy involves waiting for an initial range to form (e.g., in the first 15-30 minutes of trading) and then placing a trade once the price breaks out of that range. This allows the initial, unpredictable volatility to settle, providing clearer entry and exit points.
Key Takeaway: Wait for the market to establish a short-term range, then trade the breakout for a more disciplined approach.
How long should you wait to trade an IPO?
Our team recommends waiting at least 15 minutes after the stock begins trading to allow an initial price range to form.
The first few minutes of an IPO are pure chaos. By waiting 15 minutes, you allow the initial flurry of orders to be absorbed, which establishes a more reliable high and low to trade against. Some traders wait 30 minutes or even an hour.
Key Takeaway: Patience is critical; let the initial “price discovery” happen before you place a trade.
Is it profitable to buy an IPO on listing day?
An IPO lock-up is a contractual restriction that prevents company insiders from selling their shares for a specific period after the IPO.
This period, typically 90 to 180 days, is designed to prevent a flood of selling that could crash the stock price. When the lock-up period expires, the increased supply of shares available to trade can lead to significant price drops if insiders decide to sell.
Key Takeaway: Always be aware of the IPO lock-up expiration date, as it can be a major catalyst for the stock’s price. For more information on IPO risks, you can refer to guidance from the U.S. Securities and Exchange Commission (SEC.gov).
Can you short-sell an IPO?
It is often very difficult or impossible to short-sell an IPO on its first few days of trading.
To short a stock, your broker must have shares available to borrow. For a brand new IPO, the supply of borrowable shares is typically scarce to non-existent. It can take days or weeks before a stock becomes readily available to short.
Key Takeaway: Assume you will not be able to short an IPO initially and focus your strategy on long positions.
What is IPO flipping?
“Flipping” is the practice of buying an IPO at its offering price and selling it immediately on the first day of trading for a quick profit.
This term primarily applies to institutional clients or well-connected investors who are allocated shares before the stock trades on an exchange. For most retail traders, who can only buy after trading begins, the concept is more about momentum day trading than true “flipping.”
Key Takeaway: Flipping is a strategy for those with pre-market access; retail traders engage in day trading the stock once it’s live.
