At the risk of oversimplification, the most effective ways to trade stocks is to keep it simple.
One of the best ever at this was Nicholas Darvas.
His method was to put a simple box around a stock’s price consolidation and buy it as the stock came out of the top of the box and either put a stop loss below his trade price (which would be a tight stop if the stock came back into the box) or below the bottom of the box (depending on anyone’s individual risk parameters).
Darvas said he never shorted a stock dropping below the bottom of a box only because he felt he was not psychologically suited to selling short. Still that would be, especially in a bear market, as simple of buying the top of one of his boxes in a bull market.
Darvas’ book “How I Made $2,000,000 In The Stock Market” (this was the 1950s) describes his “Box System”. It is a classic. And timeless – see the chart of RACE below.
I have said before the easiest way to buy or not buy an IPO is to put a box on the high and low of its first day of trading and buy above the top of the box and short below the box. While an IPO’s first day is itself a Darvas box (blue on the chart below) as one can see here there are others also very worthwhile for the trader as well as a longer-term investor.
(Click on chart for a larger view)
When a hot IPO is launched, as was the case with Snapchat (SNAP) on March 2, the headlines are usually how much it leaped over it initial offer price. That is a worthless commentary. Unless one is on some broker’s favored clientele list, it is impossible to have the stock and to be able to sell it on that leap.
So what to do?
With IPOs this is actually one of the easiest decisions in stock trading. Simply note the high price and the low price on day one of the IPO. Those are the lines in the sand (see chart 0f SNAP below).
Buy on a close above the high of the first with a stop loss below the high of the first day. With SNAP that buy would have been at 27.09 on March 3 and it would have been stopped out the next trading at at 26.05, a loss of .3% (that’s the way it goes sometimes). From there, SNAP declined to an all-time low of 18.90 so that stop loss would have saved a lot of money, to say nothing of the anxiety of being locked into a foolish IPO buy made on whatever day.
It would have been a short sell below 23.50 if the stock could have been borrowed (difficult if not impossible this early in the IPO’s life). Regardless, today the stock is challenging its “First-Day Box” which would stop out any short sale.
So what to do now?
Basically nothing on the long side. Until it shows it can trade through its first day, it is not a buy. On the short side (easier to do now) it will be a short on the first down day below the box with the stop loss in the box.
In stock trading there are no easier decision to make than playing off an IPO’s First-day box.
P.S. when a long buy goes well it can become long-term hold as in the case of ACRS, a buy at 12.50 (see the chart below).
(right click on the chart for a better view)