Sitting on losses is never a good strategy, because those losses can pile up very quickly. Even strong stocks can plummet in one session, giving up all gains from a buy point. That’s why it’s crucial to pay attention to sell signals and know how to sell stocks.
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There are several ways to find topping plates. Chart analysis provides a clear clue via IBD’s 7% sales rule. The Sell Rule is a simple and effective way to limit your losses in a disciplined way.
When a stock breaks out of a base, pay attention to whether it falls below the base’s buy point. This in itself is not a sign of a failed outbreak. However, if the stock falls 7% or more below its value, the 7% sell rule is triggered. It’s time to exit the position before it causes further damage.
That way, investors can still take advantage of future opportunities by preserving capital. The deeper a stock falls, the harder it is to break even again. A 7% drop would require a 7.5% gain to fully recover. A decline of 20% requires a recovery of 25%. A decline of 30% requires a recovery of 42.9%.
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 will want to calculate the 7% sell rule based on your purchase price.
Selling shares: advantage for small investors
The 7% sell rule is one of the tools that nimble investors have that larger funds that take huge positions in a wide range of stocks may not. IBD founder William O’Neil would point out that it is “a tremendous advantage” that the nimble and decisive individual investor has over the institutions.
Shares of Metaplatforms (META) broke out of a flat base with a buy point of 377.55 on August 30, 2021 (1). Volume was lower than average, which could have alerted a vigilant investor. Shares rose to 384.33, but soon began to fall.
The stock fell below its 50-day moving average on September 20 (2) – the first sign of trouble.
That same day, Meta fell to 349.80. That was a decline of 7% (to 351.12) from the buy point.
Two days later the share fell and the loss of 7% was now clearly visible. Shares plummeted to 88.08 in November 2022. That’s a 77% loss from the August 2021 entry.
Despite the 148% gain this year, Meta has yet to return to August 2021 levels, and investors holding on to the stock would still be waiting to break even again. But those who sold in September 2021 would have the capital to get back into the stock for the 2023 rally.
How to Sell Stocks: Market Conditions Matter
The 7% selling rule also applies in bull markets. But in a bear market, it may be wise to get out of the market early if stocks fall 3% to 4% from a buy point after a breakout.
The 7% selling rule is one of the simplest rules for investors to follow. IBD called it the 7%-8% sales rule, but in practice this is treated as a 7% loss trigger.
This article was originally published on July 14, 2023 and has been updated. Please follow Vramakrishnan on Twitter for more stock market news today.
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