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How To Trade Apple

|Includes:Apple Inc. (AAPL)

First of all, let me offer my condolences to any long term Apple Bulls (aapl) reading this piece. Its purpose is to try to help people understand how I went from Perma Bull to Apple Bear, and where to go from here.

Don't get me wrong. I'm not a perma bear. I will go long again when the chart tells me to, and when the trend changes. Until then, I am either short or out.

I see many positive Apple articles on SA, mostly of the fundamental kind. I don't know that I've seen any like this one, because if I had, it would have given me guidance on how to properly invest not just in Apple, but how to invest, period.

It would have told me long ago that I wasn't doing things the right way.

Fortunately, my sinking balance told me that.

I've been long Apple since I first bought in back in Oct 2011, when the price was in the low 400's, and rode it all the way to the peak of $705.00, and rode it all the way back down to $445.00 before finally exiting that trade last week on 02/27/2013. My average cost was $560.00 a share when I exited.

How did I let this happen? How did you let this happen, if you're like me? My thinking during this process was that Apple will come back. It always had, and it may yet. It's just a matter of time. So I waited patiently, oblivious to things like trends, stops, trading rules, and anything else that would have prevented me from being on the wrong side of this long term downtrend.

I read all the positive articles on SA about Apple's great products, low PE, and rosy future.

I read Zaky's piece on Apple to $1,000.00. I saw the article on the Apple Slingshot. Even just last week, another rosy piece came out about how Apple was not worth $460.00, it was worth more!

A stock is only worth whatever people are willing to pay for it at that point in time. Last I checked they were willing to pay $420.00 for it.

That article was right. Apple isn't a $460.00 stock!

I read all the fundamental articles, even though I didn't understand them. I thought man, there are some really smart people writing this stuff, with all their charts and statistics and mathematical formulas. And when they said Apple is a great buy, what choice did I have? I believed them. They were obviously smarter than me.

My entire investing plan was based on reading positive fundamental articles on Apple, to the exclusion of all else.

Oh, I read the negative stuff too. But I was in love with this stock. I thought the naysayers couldn't be right. The Bears were just so wrong about this wonderful stock, I thought. I chose to believe one side over the other, without knowing who was right and who was wrong.

So as I slowly, excruciatingly watched as my $50,000+ profit turned into a $40,000+ loss, I decided I'd better get off my duff and do something, learn something, because this investing based on fundamentals is just another way of saying I was investing on hope, without a plan, and that I didn't know a bleeping thing about what to do with my Apple investment.

I am just beginning my road to recovery, to try and repair the damage done to my portfolio, thanks mostly to being on the wrong side of the market trend when it came to Apple.

At one point, my balance was $230.000. Last week it dipped to $65,500, before settling in at $66,600 thanks to some Apple puts I bought last week, after I finally rid myself of this bad trade.

And that's how you should look at any trade, as simply a trade. As in every trade, you either make money, or you lose money.

Sure, my losses weren't all due to Apple. I lost over $30,000 in Facebook, too. I blame that on not having a set of rules to trade buy. I treated facebook like I treated every trade I did. Buy long and hope for the best.

But the majority of my losses stemmed from being long in Apple from $705.00 all the way down to $445.00, when I closed out my position last week.

Notice I didn't call Apple a horrible stock. I didn't call Apple a broken stock. Apple is simply a stock….in a downtrend. That's all it is.

That's how you have to play it.

If you're long Apple, you're on the wrong side of this trend. It's simple, really. Don't fight the market. Why would you? You will never win.

No stock is horrible. A stock either goes up, or a stock goes down, or a stock goes sideways. There are no good or bad stocks. There are only good or bad positions. You have to trade with the market. Not against it.

The market is always right.

The market always wins.

Never forget that.

If you want to make money in the market, you have to trade with the market.

If you want to lose money in the market, you have to trade against the market.

If you're long Apple, you are trading against the market, and you are losing money.

If I had a plan in place, my losses in Apple would not have occurred. My losses in Facebook would not have occurred. I would have enjoyed many profitable trades, and minimal losses.

You have to have a plan in place before you do any trade. You can't trade based on emotion. You can't trade based on fundamentals (hope). You invest based on fundamentals, and then cross your fingers and pray.

I tried that method for a long time, over a year now.

It doesn't work.

If you have a plan in place, and apply that plan to each trade you do, it will take all the guesswork and emotion out of any trade, and you will make money.

Going into a trade without a plan is akin to going to war without any weapons. You wouldn't do that, would you? So why would you go into a trade without any weapons (a plan)? The market will hammer you if you don't have a plan. The market doesn't care about you. The market always wins.

Your goal should be to make as much money as you can on your winning trades, and lose as little money as you can on your losing trades, because you will have both, even with a plan.

You accomplish this by knowing your entry point on a trade, and your exit point on a trade. You accomplish this by going with the market, not against it. If your stock is trending up, you buy it. If it's trending down, you short it.

Don't be stuck always on the long side of every trade you do. There are just as many money making trades going short, and not capturing them is a bad idea.

Going short can actually be more profitable than going long, because markets tend to move faster and farther on the downside, because fear outweighs greed.

Once you decide on a good entry point, open a small position. The reason for this is because you can test the trade this way, and if the trade goes against you, you can exit with a small loss. If the trade goes in your favor, you can add to the position and build your position in a winning trade.

Don't build your position in a losing trade. If your trade goes against you, you should have a stop in place to capture your profits, or limit your losses. At the beginning, you may want to have a tighter stop in place. After the trade starts making money, you can give it some room to run and loosen your stops if you want. it's your choice. You are now controlling your money, instead of the other way around.

Had I simply had a stop in place, I'd still have most of my money. I was always scared to take my profit, and my profit went away. You have to take your profit when a trade goes against you. Don't be afraid to exit a trade. There will always be more trades. You won't hit on them all, but you will hit on more than half of them if you have a plan, and some will be real winners.

Before I go further, let me give you a set of rules you can implement. These rules, if followed, will give you a better idea on what to do if you're long Apple right now (see rule #4).

1. Always trade in the direction of the market, long or short. Never go against the market.

2. Protect your profits with stops

3. Limit your losses

4. If you're in a bad trade, get out. Now.

5. Ignore the chatter. Never listen to rumors or take anyone's advice. They will only serve to distract you from your plan and create doubt. Focus on the trend and the price movement.

6. Stick to your rules and never deviate

7. Plan your trade, and trade your plan

8. NEVER fall in love with a stock

9. Automate your trades.

10. Never have all your eggs in one basket

11. Never bet more than you can afford to lose.

12. Avoid buying or holding stocks at all time highs, or selling stocks at all time lows (my biggest mistakes) Sell high, buy low.

13. In an uptrend, If a stock closes over the previous swing point high on lower volume, then the trend is suspect and has a lower probability of continuing higher. Look for higher volume at a higher close. The same is true on downtrends, look for higher volume on lower close.

14. Trade less

15. Stay in the trade longer

16. Trade the trends

17. Know how to spot a trend change.

Now, let's go over each segment of this plan.

1. Always trade in the direction of the market, long or short. Never go against the market.

You have to be able to determine the direction of the trend, and trade in that direction. I don't think anybody would seriously think that being long Apple from $705 down to $445 was a good idea. Had I followed this simple rule, I'd have closed my position and shorted Apple a long time ago. Don't fight the trend, and don't fight the market. The market will always win. The market is never wrong.

2. Protect your profits with stops

If your trade is going against you, you should get stopped out. I've been trading without stops on Apple the whole time. If I had stops in place…….well, you get the picture. Determine beforehand how much you can afford to lose on the trade, and set your stops accordingly. You may miss out on some big movements, but at least you'll live to fight another day. So far, my exit at $445.00 has proven to be the right choice.

3. Limit your losses

This is the same as protecting your profits. Set your stops. If the trade goes in your favor, you can loosen your stops a little to let your winner run. If it goes against you, take your small loss and get ready for the next one.

4. If you're in a bad trade, get out. Now!

This one is self explanatory. When I decided to exit Apple last week, I didn't follow this rule. I sold my 300 shares, then bought them right back the next day after watching the price jump because of the rumored stock split. I took another $1,500.00 loss before exiting for good and buying puts. I also ignored another rule. Ignore the chatter. I bought on the rumor of the stock split. Focus on the price and tune out the chatter. You should only go long on Apple when an uptrend has been confirmed. And a change in trend could take days or weeks before it's confirmed. I broke my own rules, and It cost me. I actually broke 3 rules before finally letting go of Apple. I didn't get out of a bad trade right away, I didn't follow the market, and I didn't stick with my own plan.

5. Ignore the chatter

This means don't get distracted by articles you've read, things you've heard, or advice you get from people. Your focus should be on following the price movement. If you can learn how to spot a trend, you can trade any market, any stock, commodity, future, anything, and you will have the same rate of success. You don't need to learn about the fundamentals of any investment you're considering, because you will focus on the chart and its price movement, and that's all you need to focus on.

6. Stick to your rules and never deviate

This one is self explanatory, but it is extremely important that you do not forget it. This will prevent you from making impulsive decisions, take all the guesswork out, and make your life a lot easier. You will have a pre determined entry point, and a predetermined exit point. You will have big winners and small losers if you just stick to your plan.

7. Plan your trade, and trade your plan

You have to determine an entry point and an exit point. You do this by following a price movement and if the stock is moving in the direction you want, you get in during the early stages of the movement, and plan your exit according to how much you're willing to lose on the trade. Set your stop and go about your day without worrying how the stock is doing. If you get stopped out, fine. You may want to get right back in if the price moves again in your favor, or you may just move on to another trade. If a stock hurts you repeatedly over and over again, stop trading that stock. If you don't get stopped out and the trade goes in your favor, that's when you want to add to your position.

8. Never fall in love with a stock

There are plenty of people out there who love Apple. They think it can do no wrong, despite all that has gone wrong. Do not fall in love with any stock. Apple is just another stock, just another trade, and it should be treated as such, following the trading plan you decide to implement. If it's a bad trade, and being long right now makes it a bad trade, get out. You have to follow the trend, and that trend is pointing down right now. If it turns and starts trending upwards, so what? You can always jump back in. But only after you have confirmed that the trend has changed. Until the trend changes, Apple is a short.

9. Automate your trades.

Once you determine an entry point and an exit point, set your trade to execute automatically. This will take the guesswork out and eliminate stress. Stick with your plan, and never deviate.

10. Never have all your eggs in one basket.

I violated a lot of my rules because I didn't have them in place at the time. I went all in on Apple and even bought shares on margin. At one point, I owned 481 shares, and I carried a margin balance of $116,000 or so each month. The way I figured it, I would always be getting a lot more in returns than the $700.00 a month or so I was paying to carry all these shares. I went all in, with no stops, I was in love with the stock, with no plan in place, reading all the hyped up articles on Apple (chatter), I didn't limit my losses, or protect my profit, I went against the trend, and I didn't exit a bad trade. 9 rules broken right there, and it cost me dearly.

11. Never bet more than you can afford to lose.

Start each trade with a small position. If the trade goes in your favor, add to the position. Adjust your stops along the way.

12. Avoid buying or holding stocks at all time highs, or selling stocks at all time lows (my biggest mistakes) Sell high, buy low.

I learned this one the hard way. Believe it or not, my first trade was $50,000 in GLD on Sept 6th, 2011, when gold was at its all time high. I literally purchased the stock less than $2.00 a share from its peak. The stock sank rapidly over the next 3 weeks, but not before I had a chance to sink another $50,000 in some more gold stock, and I watched helplessly as my positions dwindled to a $30,000 loss within 3 weeks. Do you think that would have happened to me if I had my rules in place? I also bought into the facebook IPO, and lost $7,000 that first day, buying $50,000 worth of stock at $42.00 a share. Glad I got out when I did, but if my stops were in place, I'd have lost much much less. I also bought Facebook puts within less than $2.00 of its all time low. I lost another $23,000 there because again I didn't trade with stops, and I entered the position with a huge amount of money, not knowing which way the trade was going to go. Stocks will eventually fall off their all time highs, and they may or may not recover. Be prepared to profit when they fall.

13. In an uptrend, If a stock closes over the previous swing point high on lower volume, then the trend is suspect and has a lower probability of continuing higher. Look for higher volume at a higher close. The same is true on downtrends, higher volume and a lower close. Volume is very important. Keep an eye on it.

Look for higher volume trades. They have a tendency to move faster, making the trade more profitable.

14. Trade less

If you've lost a lot, it will help you to step back, take a look at how you're doing things, and plan your trades better. You do not always have to be trading. If you must always be in the market, find trades in a strong trend, and follow that trend.

15. Stay in the trade longer

This will give your winners a chance to run. I just started trading this system a few days ago, so I haven't had a chance to let my winners run much yet. But if you're in the green on a trade, you may want to loosen your stops a little bit so you don't get stopped out early on a winning trade. Try to ride the trend to its completion.

16. Trade the trends

Know how to spot a trend change. To spot a change from an uptrend to a downtrend, look for the following to occur

A. A trend line is broken

B. There is a retest and failure

C. Price falls below the prior low

Here is a good website to check out for a more detailed explanation on trends.

http://www.swing-trade-stocks.com/

I also like the book, "How I made $2,000,000 in the stock market" by Nicolas Darvas

I also started reading "Trader Vick: Methods of a Wall Street master"

These 3 references helped me mold my rules, and helped me understand what to do.

For a good charting website that is free and will show you all kinds of charts in major trends, go to finviz.com

I am not looking for any sympathy. Some of you may hold me up to ridicule or scorn. But I don't care. It is what it is. I screwed up, and what happened to me should not have happened, to me or anybody.

If it happened to you, maybe this will help. That's all I care about.

I have only myself to blame for going to war without any weapons. I'm just glad I didn't get killed. I was in critical condition, but just last week I found life support.

I finally realized the folly of my decisions regarding Apple, and trying to fight the market. Trying to outguess the market.

It wouldn't have happened if I'd had these set of rules to follow, and followed them without fail. I would still have most of the $30,000 I lost in Facebook if I'd had these rules in place.

I have no doubt I'd be much better off today if I hadn't fallen in love with a stock. But it was a very expensive lesson, one that cost me over $160,000. If I learned something from it with my new rules, then maybe it will have been worth it. Time will tell.

Because honestly, I didn't know how to trade. I didn't know how to take it to the next level. I was perfectly content to just call myself an investor, sit on my holdings and wait until the share price reached $1,000.

I often wondered how long it would take this stock to reach the dizzying heights the analists predicted.

But that's not learning. That's not investing. That's letting Mr. Market decide what to do with my money.

It's gambling, plain and simple, because you don't know if the stock will recover, and if you're long, you're gambling that it will.

If you trade with the market, you will make money.

If you trade against the market, you will lose money.

Always trade with the market.

I don't have anything to sell you. I just want to have an open discussion about these ideas, get some different opinions, and maybe help someone who has suffered a similar fate.

But what if Apple shoots up tomorrow? What if people sell and miss out on that movement? My answer to that is, so what? They can always get back in to Apple if they think the trend has changed.

I found out last week that you can't confirm a change in trend based on one positive day. The stock has to consistently close on higher highs and higher lows before a trend change can even be considered.

I'm not asking people to sell their shares and go short. What you do is your responsibility, no one else's.

All I'm doing is suggesting that you have a solid plan in place, and stick to that plan no matter what, and follow the market. That's all.

What you decide to do with your shares is up to you. I closed out my position last week at $445.00 and saved myself from another $7500.00 loss. Rule #3 and #4 were in effect.

Will there be a time to go long in Apple? Yes, but that time is not here yet. And no amount of buying you do is going to change that. You have to follow the trend, and never fight the market.

Finally, I'd just like to add that I'm just learning about technical investing in the past few weeks. That's why I've lost so much money. I didn't have a plan in place. Oh I've read about technical investing before, but I just quit trying to learn and just sat back and watched what Apple did, waiting and hoping for the best.

I became an investor. Which turned out for me to be an excuse for being lazy. Why try and learn? Just buy a stock, read plenty of positive articles on said stock, hope for the best and let it go. Easy!

It turned out to be the wrong strategy.

You can't be passive. This is real money we're playing with. You have to be aggressive and play different trades, different markets, long and short. Eventually you will hit a big winner, and you will ride the trend, and you will take your profits.

It's great to let a stock run, but when that trade goes against you, take your profit and get out if the trend has changed. It's a fine line. You can't time the market. You will leave some trades too soon. Some you may enter too late. But you will take your profits, and limit your losses.

It took me 6 months to destroy my portfolio. I hope I can get it back a lot sooner than that.

Armed with a plan, at least I'll have a fighting chance.

I no longer fear my portfolio. This great weight of a bad trade has been lifted from my shoulders. I look forward to my next big winner, and have confidence I'll find one. It doesn't even have to be Apple.

Good luck, everybody!

I posted this article so that I can put my ideas together and refer back to this article when I need a reminder.

If anybody has anything to add to my plan, let's hear it.

3 principles to trade by:

1. Preservation of capital

2. Consistant profitability

3. The pursuit of superior returns

Stocks: AAPL