As you gain more experience traders develop biases about stocks and where they should be priced. Often this is helpful. At times it can lead to potential rips. As an experienced trader I have learned that my biases must be verified by the Box, the price action in the stock. Who am I to decide where a stock ought to be priced? I am not SAC Capital. And I want to share a story with you on this very point. Please remember your biases must be verified by the price action.

AAPL is a stock that I trade each quarter in the days prior to their earning’s release and the days that follow. When AAPL is “In Play” it is a great stock to trade for an experienced equity trader. Trading it in the aftermarket after they report their quarterly earings presents great opportunity as well.

On Tuesday I held a meeting with a few of our more experienced traders and we discussed a gameplan on how to trade AAPL when they released their numbers. We had a detailed plan as to what numbers we wanted to hear in order to establish a position immediately after the announcement. Otherwise, we wouldn’t establish a position until the direction of the stock became clear. We discussed the things that we would need to see in the Box to confirm our trading bias. If we didn’t get confirmation from the Box then we would have to close our positions and change our bias.

We were all sitting with our hands on the keyboard from 4:01PM to 4:30PM waiting to pounce the moment the numbers came out. But that plan was foiled by the “wisdom” of the NASDAQ who decided that no after hours trading should be allowed until 5:10PM. Perhaps this played a part in the huge rip that I ended up taking when trading finally resumed. It was pretty tiring to sit in the ready position for 35 minutes just to see a press release stating that we would be unable to trade AAPL because of a trading halt.

One of my favorite things about trading in the after market is that I find it very easy to game what the large players are doing in the stock that I am trading. During the day there are tons of algorithmic trading programs that make it more difficult to read stocks and prevent the clean moves that you tend to get once the program are shutdown for the day (programs wouldn’t dare trade in the aftermarket as the spreads are wider and there is less liquidity).

So AAPL resumed trading at 5:10PM and was about $88 per share. I shorted some around $88 because they had issued extremely poor earnings guidance for the following quarter. AAPL is usually conservative with their guidance but the guidance they issued was beyond conservative. It was downright ugly. AAPL quickly moved up to $93. That was my first signal that the big players weren’t taking AAPL’s guidance seriously and would use this opportunity to accumulate shares. I closed my short position for a loss.

Over the next few minutes it move up to $95 per share. There was quite a bit of selling at $95 so I decided to short it again. When it began to trade above $95 I should have immediately covered my short position and gotten long. Instead I didn’t cover my short position and got short more shares when the $95 buyer dropped. That was mistake number two. Whoever was accumulating a position decided to drop the bid a couple of times but the stock would immediately pop right back above $95.

I finally gave up on my short after it popped another 2.5 points. What a rip! What an unnecessary rip. The first loss I took at $88 was fine. It was part of my original game plan. But shorting after the stock had shown great strength was silly. I ended up losing a ridiculous amount of money. I would tell you how much but my father sometimes reads this blog and he would be in a state of shock if he saw the number in print.

The main takeaway from this experience for me is that you must always execute on your gameplan and if you do not have confirmation from the price action to support your position then get flat and reevaluate.