- Apple Inc. stock price is up by nearly 10% over the last couple of weeks.
- Sometimes investments turn into short-term trades.
- When you get a windfall profit in a short amount of time, should you take it?
From the time I posted the Apple article until now, which is about a two week time frame, Apple (NASDAQ:AAPL) stock went from about 103 to 113. I am not saying that I called a move. I just pointed out a high probability scenario. Even I did not expect the stock to move about 10 to 12% in 1 to 2 weeks. Since the move occurred, you may be tempted to hold the stock expecting future highs. Well, we don't know that for sure.
(Source: Yahoo Finance)
In my opinion, there is no need to have strong conviction or beliefs of what the stock could do since it could do anything. You need to figure out how to protect your account. In this respect, there are a few ways to go about it.
First, many people always talk about beating the market and getting an annual average of 10% returns. While the former is after the fact analysis, the latter is very attainable even in this market if you control your emotions and simply take your profits when you get them. AAPL gave you nearly 10 to 12% in less than 2 weeks. Rather than holding for 1 year and hoping to achieve that amount, you got it quickly. There is no need to think. Take your profits and move on to the next stock is one approach.
The other approach is trailing AAPL with a trailing stop-loss. There are many ways to go about it. However, the more leniency you give, the more likely you will turn a profit into a loss. The simplest method that I have seen is using moving averages. In the chart above, I put a 9 period SMA and 20 period SMA. You can choose exponential or weighted and use a different combination of averages if you like. I have found that these averages keep me on the correct side of the market most of the time. Anyways, when quick and unexpected moves like these occur, watch how price reacts when it gets to the 9 SMA. With Apple stock, we see that it closed below the 9 period SMA. That point would be an ideal time to remove all of your profits. Granted, you did not make "a lot" of money as you would have getting out at the high, but at least you made some. 103 to 113 is about 9%, and that is nothing to complain about.
Most people, however, would not want to sell all their shares of AAPL. That is totally understandable. This is where the concept of scaling out comes into the picture. There are a variety of ways to go about it, but I will give you one scenario to think about.
Apple stock rose from 103 to 115 in 4 days. You assume it may continue to go higher. Two days later, AAPL appears to be stalling, and you do not want to lose what you have made. You decide to take off 50% of your position and let 50% run. It takes the mental burden away from you and puts your mind at ease. This is important because now you can think clearly about what next steps need to be done. Over the next few days, you observe that AAPL is not moving high and is slowly drifting down. Even though you still have profits in your remaining 50%, you do not want to give them back. You trail your position with a 9 SMA. As soon as AAPL stock price gets near the 9 SMA, you take profits on 50% of your remaining position leaving you with 25% of your original position. Depending on how aggressive you are, you can trail with a 20 SMA or put a hard stop-loss a couple of dollars above your initial entry price, and let the market do its thing.
Keep in mind, I am not advocating short-termism, but you have to learn to adapt when something unexpected comes your way. The converse is true as well. Hopefully, this gives you ideas on how to hand windfall profits.