2 Takeaways from the Facebook IPO

08/02/2012 7:00 am EST

Focus: STOCKS

The social media stock has made fools of many investors and traders in the short time since its launch, but whether or not you lost money, there are two lessons you can learn from the mess, writes Tyler Craig.

The day-by-day lower lows of Facebook (FB) continue to be a thorn in the side for shareholders of the social media behemoth. Indeed, with FB falling to new lows today, we can officially say that everyone who ever purchased the toxic stock is underwater.

Yet, hidden within the epic failure are a few vital trading lessons which should be imprinted in the minds of both those who have the misfortune of holding shares of FB in their portfolio as well as curious spectators viewing the debacle from afar. Let’s review my top two:

     1. Financial ruin beckons traders lacking an exit strategy.

Those who venture into the stock market without an exit strategy in tow have climbed aboard a train speeding toward a single destination—the financial graveyard. This final resting place boasts an innumerable host of has-been traders with a stubborn disposition and a friend called “hope” who accompanied them all the way to their death beds.

Facebook loyalists unwilling to part ways with their shares are realizing the once-promising social titan is engaged in a cutthroat game of limbo. To the spectators chanting, “How low can you go?” FB continues to surprise with its ability to reach new depths.

Traders in possession of an exit strategy who bailed early when FB ran amiss have lived to fight another day. Those still participating in the death spiral are witnessing firsthand the mercilessness of buy and hope.

     2. The IPO playground disallows the use of technical analysis.

One of the weapons of choice for short-term traders is technical analysis. By analyzing past price action, technicians contend they can better forecast the future. Technical analysis can also be a very effective risk-management tool. Traders are able to use key support or resistance levels to assess the potential risk and reward involved in a trading opportunity.

The trouble with IPOs, of course, is their utter lack of prior price action. Without an existing trend or price levels to trade off of, determining risk-reward degenerates to a guessing game and the purchase of an IPO becomes a mere roll of the dice.

This explains why many veteran traders opt to wait for the IPO frenzy to die down and allow the stock to establish a trend, along with important support and resistance levels to serve as reference points for future trading opportunities.

If Facebook has extracted more than its fair share of greenbacks from your war chest, chalk it up as a learning experience. Take the two aforementioned lessons to heart and modify your trading accordingly.

Tyler Craig can be found at TylersTrading.com.

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