Within the past four months, Apple (AAPL) - Get Report traded higher than $200 a share, collapsed to below $120 and levitated higher than $190 again, before its recent softness. This rollercoaster ride, so common among stocks, offered multiple opportunities to buy, sell and sell short.

We buy when we feel optimistic -- or are afraid of missing a good thing. Perhaps you read a story about a new product or heard rumors of a merger. Maybe you ran a technical scan or found a promising chart pattern on the screen. You had some money in your account and called your broker (or went online) to place a buy order.

You've received a confirmation -- now you own this stock. That's when the stress begins. If the stock stays flat and goes nowhere you feel restless. Did you pick a wrong one again?! Others are going up -- should you sell yours?

If your stock begins to rise, it creates a different kind of anxiety. Should you take profits now, add to your position, or do nothing? Doing nothing is hard, especially for men, who are trained from childhood on "don't just stand there, do something!"

When your stock drops, the anxiety becomes mixed with pain - "I'll sell as soon as it comes back to even."

Amazingly, the most psychologically comfortable position for most traders is a slight decline in their stock. It is not sharp enough to be painful, and with the stock near your entry price there is probably not much reason to sell. With no action required, you have a perfect excuse to sit back and do nothing. It feels good not to have to make


decisions. That is how a small loss can gradually become a bigger and badder loss.

If you throw a frog into a pot of hot water, it will jump, but if you heat it slowly, you can cook it alive. Traders with no clear selling plans can end up boiled alive.

The worst time for making any decision, including the one to sell, is when you feel under the gun. This is the reason why I urge you to write down a trading plan, as shown below,


you put on a trade. A good plan must outline your reasons for entering a trade, define your entry price, include a protective stop, and a profit target. Setting stop and target levels means making a decision to sell. Making those decisions


you enter a trade allows you to use your brain instead of jumping in response to heat like some poor frog.

Psychologists have proven that the quality of decisions we make under stress is lower than those we make in a peaceful and relaxed frame of mind. You are likely to make better decisions, increase your profits and reduce your losses if you write down your selling plan


you buy that stock.

A written trading plan accomplishes an amazing feat -- it increases your profits


reduces losses!

So, why not do it?

Two reasons. First of all, most traders have never been taught what you have just read. Beginners and outsiders simply do not have the knowledge.

The other reason is that people like to dream. A written plan cuts into their sweet daydreaming business. It feels nice to lean back and drift into a vague fantasy of riches. Sitting up straight on a hard-back chair and writing down your specific goals as well as a contingency plan robs you of that vague daydream.

We all like to daydream, but since you are reading this I will assume that you have chosen the pleasure of real money over that of daydreaming. You probably want to learn how to sell, so that you can make more money while risking less.

Writing down a plan and executing it from a sheet of paper helps you reduce tension by separating the two jobs you have: analyzing and trading.

Give your "analyst" the luxury of peace and quiet, as he thinks and writes down his plan. Give your "trader" the luxury of simplicity in the midst of action -- give him a map and let him run with it, focusing only on implementing decisions. Keep the two jobs separate. Let the analyst think. Let the trader execute. Let them work as a team instead of stepping on each other's shoelaces in some crazy dance.

The Three Types of Selling

Whenever you plan to buy a stock, ask yourself whether you plan to own it for the rest of your life and leave it to your heirs. Since the most likely answer is "no," the next question must be - what will prompt you to sell this stock.

Obviously, you buy because you expect the stock to rise. How high does it need to fly for you to say "Enough!" and sell it? Do you have a specific price target or a range of targets where you will seriously consider selling? Is there a price or indicator pattern that will tell you the uptrend is at its end and it is time to take profits? Needless to say, the best time to answer such questions is before you enter a trade.

What if you are wrong about the rally, and the stock slides instead of rising? How low does it have to fall for you to pull the trigger and shoot the puppy? The worst time to make such decisions is when you own the falling stock. As it keeps sliding lower and lower, there will be signs of the stock being oversold, of the decline being at its end and about to reverse.

If you are unwilling to take a loss, you can delude yourself for a long time and suffer serious damage. The best time to make a decision about when to get rid of a stock is before you buy it.

Finally, you may decide to sell if a stock does not move within a specified period of time or if it traces a suspicious price or indicator pattern. What does this stock have to do to challenge your bullish outlook? I call this type of selling "acting in response to engine noise." As you become more experienced, your ears will become more attuned to such noise.

In summary, you can divide selling choices into three main categories:

1. Sell at a profit target above the market.

2. Be prepared to sell below the market, using a protective stop.

3. Sell before the stock hits a target or a stop -- because market conditions have changed and you no longer want to hold it.

Each of these selling categories deserves its own book, but I managed to make each of them into a single chapter. If what you have read so far sounds logical to you, we can continue our conversation on the pages of my latest book,

Sell and Sell Short


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