Sitting on losses is never a good strategy because those losses can pile very quickly. Even strong stocks can dive and give up all gains from a buy point in a single session. That is why watching for sell signals and knowing how to sell stocks is vital to investing.
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There are different ways of finding topping signs. Chart analysis offers a clear clue through IBD's 7% sell rule. The sell rule is a simple and effective way of cutting your losses in a disciplined manner.
When a stock breaks out of a base, watch out if it falls below the base's buy point. This in itself is not a sign of a failed break out. However, if the stock falls 7% or more below the entry, it triggers the 7% sell rule. It is time to exit the position before it does further damage.
That way, investors can still be in the game for future opportunities by preserving capital. The deeper a stock falls, the harder it is to get back to break-even. A drop of 7% takes a 7.5% gain to fully recover. A drop of 20% takes a 25% rebound. A 30% decline takes a 42.9% bounce.
The 7% stop loss applies to any stock purchase at any level. If you bought a stock at 45 and the buy point was at 43, you want to calculate the 7% sell rule from your purchase price.
Selling Stocks: Advantage For Small Investors
The 7% sell rule is one of the tools nimble investors have that larger funds that hold massive positions among a wide range of stocks may not.IBD founder William O'Neil would point out that it is "a terrific advantage" that the nimble and decisive individual investor has over the institutions.
Shares of Meta Platforms (META) broke out of a flat base with a buy point of 377.55 on Aug. 30, 2021 (1). Volume was lower than average, which could have alerted a watchful investor. Shares rose to 384.33 but quickly started to fall.
The stock fell below its 50-day moving average on Sept. 20 (2) — the first sign of trouble.
That same day, Meta's dropped as low as 349.80. That was a 7% decline (to 351.12) from the buy point.
Two days later, the stock gapped down and the 7% loss was quite clear by now. Shares plummeted to 88.08 by November 2022. That's a loss of 77% from the August 2021 entry.
Despite its 148% gain this year, Meta has yet to get back to its August 2021 levels, and investors holding on to its shares would still be waiting to get back to break-even. But those who sold in September 2021 would have the capital to get back into the stock for its 2023 rally.
How To Sell Stocks: Market Conditions Matter
The 7% sell rule holds true in bull markets. But in a bear market, it may be wise to exit earlier if the stock falls 3% to 4% from a buy point after a breakout.
The 7% sell rule is one of the simplest rules investors can follow. IBD had been calling it the 7%-8% sell rule, but as a practical matter, it is treated as a 7% loss trigger.
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FAQs
The 7% stop loss rule is a rule of thumb to place a stop loss order at about 7% or 8% below the buy order for any new position. If the asset price falls by more than 7%, the stop-loss order automatically executes and liquidates the traders' position.
What is the 7% rule in the stock market? ›
Always sell a stock it if falls 7%-8% below what you paid for it. This basic principle helps you always cap your potential downside. If you're following rules for how to buy stocks and a stock you own drops 7% to 8% from what you paid for it, something is wrong.
What is the 7 percent rule in investing? ›
The seven percent savings rule provides a simple yet powerful guideline—save seven percent of your gross income before any taxes or other deductions come out of your paycheck. Saving at this level can help you make continuous progress towards your financial goals through the inevitable ups and downs of life.
Should I sell my stocks before a crash? ›
It's normal to feel pessimistic after a crash, but if you're investing for the long term, doing nothing is often the best course. It's important to remember that when you sell investments in a downturn, you lock in your losses.
Who buys stocks when everyone is selling? ›
But there's one group of investors who charge in to buy when stocks are selling off: the corporate insiders. How do they do it? They have 2 key advantages over you and me that provide them the edge during uncertain times. If you follow their lead, you can have that edge too.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
What is No 1 rule of trading? ›
Rule 1: Always Use a Trading Plan
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.
What is 80 rule in stock market? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
What is the 90% rule in stocks? ›
The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds.
Is 7% annual return realistic? ›
In short, the average stock market return since the S&P 500's inception in 1926 through 2018 is approximately 10-11%. When adjusted for inflation, it's closer to about 7%. [Since we're talking citations in this post: Investopedia.]
1 At 10%, you could double your initial investment every seven years (72 divided by 10). In a less-risky investment such as bonds, which have averaged a return of about 5% to 6% over the same period, you could expect to double your money in about 12 years (72 divided by 6).
How do I double money in 5 years? ›
One can also use this to compute the returns a portfolio should generate to double money in a given time period. If you want to double it in five years, the portfolio should be invested such that it yields 72/5=14.4%.
Where is your money safest during a recession? ›
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Do I lose all my money if the stock market crashes? ›
Even if your brokerage account suffers a loss of value, you have a chance to regain and even exceed the loss as the stock price recovers—as long as you don't sell your shares.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
What is the 6% stop-loss rule? ›
The 6% stop-loss rule is another risk management strategy used in trading. It involves setting your stop-loss order at a level where, if the trade moves against you, you would only lose a maximum of 6% of your total trading capital on that particular trade.
What is the 8 loss rule? ›
The 8% sell rule is a strategy used by some investors to minimize losses and help preserve their capital. The rule is typically applied when a stock drops 8% under your purchase price—regardless of the situation. Keep in mind that this isn't a hard-and-fast rule.
What is the best stop-loss rule? ›
4. What stop-loss percentage should I use? According to research, the most effective stop-loss levels for maximizing returns while limiting losses are between 15% and 20%. These levels strike a balance between allowing some market fluctuation and protecting against significant downturns.
What is the formula for stop-loss? ›
Calculate Stop Loss Using the Percentage Method
Additionally, let's say you own stock trading at ₹50 per share. Accordingly, your stop loss would be set at ₹45 — ₹5 under the current market value of the stock (₹50 x 10% = ₹5).
Shares of Meta Platforms (META) broke out of a flat base with a buy point of 377.55 on Aug. 30, 2021 (1). Volume was lower than average, which could have alerted a watchful investor. Shares rose to 384.33 but quickly started to fall.