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.
Meta didn't get back to its August 2021 levels until January 2024. Investors holding on to its shares from the sell signal would have waited more than two years 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.
This article was originally published July 14, 2023, and has been updated. Please follow VRamakrishnanon Twitter for more news on the stock market today.
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FAQs
To make money in stocks, you must protect the money you already have. That brings us to the cardinal rule of selling. 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.
Do you lose all your money if the stock market crashes? ›
Again, you technically don't lose any money in the stock market unless you sell your investments. If you simply hold your stocks until the market rebounds, your stocks should regain their value. The key is to ensure you're investing in strong stocks that have the ability to weather market turbulence.
What is the 7% rule in stocks? ›
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.
What is the rule number 1 in investing? ›
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule.
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.
Should I sell my stocks now in a recession? ›
While selling stocks during a market downturn might make you feel better temporarily, doing so reactively because stocks are tumbling isn't a good long-term investment strategy. Volatility is a normal part of investing in the stock market, so occasional market selloffs should be expected.
Who gets all the money when the stock market crashes? ›
When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Drops in account value reflect dwindling investor interest and a change in investor perception of the stock.
Do 90% of people lose money in the stock market? ›
About 90% of investors lose money trading stocks. That's 9 out of every 10 people — both newbies and seasoned professionals — losing their hard earned dollars by trying to outsmart an unpredictable and extremely volatile machine.
Can the bank take your money if the stock market crashes? ›
You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
What is the 357 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
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 the 80-20 rule in stock trading? ›
While stock market investors rely on several rules to formulate their investment strategies, the 80-20 rule remains the most famous. Before we proceed, if you're wondering, 'what is the 80-20 rule? ' - it simply means that 80% of your portfolio's gains come from 20% of your investments.
What are the 4 golden rules investing? ›
They are: (1) Use specialist products; (2) Diversify manager research risk; (3) Diversify investment styles; and, (4) Rebalance to asset mix policy. All boringly straightforward and logical.
What is the 80% rule investing? ›
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 are the 5 M's of investing? ›
Therefore, for both funders and founders, focus on these 5 M's in evaluating any successful entrepreneurial investment: (1) Management, (2) Momentum, (3) Model, (4) Motivation and (5) Market. As an active angel investor, I consider these 5 concepts on a regular basis when evaluating entrepreneurs for investments.
What is the golden rule for stop-loss? ›
The golden rule of Stop Losses is that they should never be moved away from the market once the trade is opened. If a trader feels that their stop loss is incorrectly placed, they are recognising that the foundations of their trade are incorrect and therefore they should close out.
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 3-5-7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
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.
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.