Doc Maher wraps up his AAPL stock trade.
In Swing Trading with Stocks I explained some of the basics of this technique. In Managing Your Swing Trade, I demonstrated how and when I would enter a stock position and also began using stops and planned exits. As I have said before, this part of trading is more of an art than a science, so you need to figure out which risk management method works best for you. In the final installment of this stock trading series, I will explain step-by-step how and why I move stops along with taking profits if they materialize.
THE PLAY - Buy Long Stock on a Pullback
TRADE FORMATION
On April 14, the following scenario occurred in AAPL stock:
High of the day: $149.25
Low of the day: $144.54
Most recent swing high: $159.69 on April 7
Target: $159.69
Potential entry: above $149.40 up to $149.50
Potential stop loss trigger: $144.50
Maximum gain: theoretically unlimited
Maximum loss: $149.50
Target gain: ~$10.19 (target - potential entry = $159.69 - $149.50)
Intended maximum loss: ~$5.00 (potential entry - stop loss trigger = $149.50 - $144.50)
Reward-to-risk ratio: $10.19 / $5.00 = 2.04
Time duration of trade: 2 to 6 days
ALL STAR COMMENTARY
As of the last post, I had just acquired my theoretical stock position and was beginning to manage my stop for it. I bought 200 shares of AAPL for $149.50 on April 15. The stock closed that day at $148.38, putting me down $1.12.
Previously I said that I would take some of my position off if AAPL reached my target of $159.69. Let's round up to $160. The night that my entry order would fill, I would split the position of 200 shares into two batches of 100 shares each.
For the first batch I will place a One Cancels Other order using a Sell Limit order and a Sell Stop order. The Sell Limit order would be to sell 100 AAPL at $160. The Sell Stop order would be to sell stop 100 AAPL with the original trigger price of $144.50 we used before. For the second batch I will place a Sell Stop order to sell stop 100 AAPL at $144.50. So after these orders are placed, this is what it will look like: if AAPL hits $160, I will sell half of my shares. I will keep the other half as long as AAPL continues to run up. If first AAPL falls to $144.50, I will sell 200 shares.
I will continue to manage the sell stop prices manually at the end of everyday. Because AAPL has not moved up that much on the first day, I will use the same sell stop price of $144.50.
Below is a chart of AAPL on April 16. Notice the move up here. OK now things are starting to look good. AAPL opened up at $151.72 and closed on the day even higher at $153.70. By the end of the day, my stock position would have an unrealized gain of $4.20 ($153.70 - $149.50). Because of this move up, I can now adjust my stops.
Click here for a larger chart of AAPL on April 16.
Moving stops is more of an art than a science. One rule often used when long stock is to move the stop up to just under the low of the previous day's candle ($145.72). I'm a little more flexible than that. I love when I can move my stop to my entry price. This means that if the stock trades lower, I would get stopped out near $149.50. As long as the stock does not gap down, I won't lose anything on the trade and I like that feeling. So now I will move both my stops up to my entry price of $149.50. I still have the order to sell 100 at $160 if the stock ever gets there.
By April 18 AAPL looked like this:
Click here for a larger chart of AAPL on April 18.
Since AAPL broke through my initial target, my order to sell 100 shares at $160 would have been filled. I would have sold the first 100 of the 200 shares for a profit of $10.50 per share ($1,050 total). The execution of this trade would automatically cancel the stop order on the first batch of 100 shares. Then I would move the stop on the remaining 100 shares up to $157. If I get stopped out here these shares would make $7.50.
On April 21, AAPL made another big move up (see below). At this point I move my stop up to $160. This was chosen by a combination of the rule and some judgment. This stop leaves $8.16 between the close on April 21 and my stop. This might be a lot but I want to give the stock a chance to run higher, especially after such a good move up.
Click here for a larger chart of AAPL on April 21.
On April 22, the second batch of 100 shares got stopped out at $160 - giving me another $1050 in profit. If I had been less aggressive with moving my stop, I might have been able to stay in longer and benefit from AAPL's continued run up (see below). Not profiting on a stock's full move will happen and I don't worry about it when it does. Regardless, this trade still would have made $2,100 (that's 7%) in six days.
Click here for a larger chart of AAPL on April 22.
Of course I could also use options instead of buying the stock. I will cover this in my next swing trading post.
"Income Trader"
Doc's previous posts: Swing Trading With Stocks and Managing Your Swing Trade
For a list of previous All-Star Trades, please click here.
Would you like your Trade Note to be chosen? Read more.
Nicole Wachs contributed to this post.
Options involve risk and are not suitable for all investors.
Please read Characteristics and Risks of Standardized Options.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Jonathan F. Maher, PhD has a professional business relationship with TradeKing.
