Many investors buy and sell Apple (NASDAQ: AAPL ) based on rumors, sales, analyst reports and blogger opinions. As effective as this may be, it is very risky for traders to let their emotions dictate their actions.
Van K. Tharp aims to dispel these emotions -- and eliminate trader illusions -- with his new book, Trading Beyond the Matrix: The Red Pill for Traders and Investors .
"My book is called Trading Beyond the Matrix for a reason," Tharp told Benzinga. "'The Matrix' is a series of beliefs that you have, most of which are illusions. Any of the ideas that you have about, 'Oh, some new product is coming out' or 'You should buy this and hold it because it's a great company,' are really not things that work that well. They're just kind of illusions."
Tharp said that Apple is a great example of how traders can benefit from going beyond the illusions.
In producing a newsletter for his website, Tharp noticed that there were several articles coming out -- three or four per day -- that focused on the fundamentals.
"I had been seeing that a long time," said Tharp. "I said, 'What if you just took Apple, which had huge trends, and just followed a 60-day moving average crossover system. You bought it when it was above the moving average and you reversed and went short when it was below."
According to Tharp, if investors had employed this strategy when the newsletter was published on January 30, they "would have been up a huge amount of money."
"You'd still be short it, by the way," Tharp added.
Short sellers have benefited greatly from Apple's decline. The iPhone maker has lost more than 22 percent of its value since the trading year began on January 2. Over the last six months, Apple has lost more than 32 percent of its value.
Tharp said that while some investors like to buy and hold, he advocates more of a statistical approach to the market. "[It] says that you don't have to be right more than 50 percent of the time as long as you're reward-to-risk ratio is quite favorable, like 2-to-1 or 3-to-1," he said.
"The first thing I advocate is that people begin to think in terms of what their initial risk is going into a trade. You should always know that [and] what your total reward will be by the time the trade is closed."
Traders should also remember that there are multiple market types to consider.
"Market types can be up, down or sideways," Tharp explained. "They can be quiet or volatile. That's at least six different market types. Each one of those is going to have a pretty easy to design, a fairly Holy Grail system for each one of those, and almost impossible to expect that system to work in other market types and work just as well. What most people try to do is find one system that works for all conditions and that never happens."
Louis Bedigian is the Senior Tech Analyst and Features Writer of Benzinga. You can reach him at 248-636-1322 or firstname.lastname@example.org. Follow him @LouisBedigianBZ
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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