One of the most important lessons in stock market trading is knowing when to exit a trade. The 7% rule is a widely used strategy to protect capital and reduce risk. Understanding this rule can improve your trading discipline and decision-making, whether you’re a beginner or a seasoned trader.
What Is the 7% Rule?
The 7% rule suggests that you should sell a stock if it falls more than 7% below your purchase price. It is a risk management strategy that helps limit losses and protect your investment capital from bigger drawdowns.
Why Is the 7% Rule Important?
- Helps prevent emotional decisions during market volatility
- Protects your portfolio from deep losses
- Encourages disciplined and rule-based trading
- Useful for short- to medium-term traders and swing traders
How to Apply the 7% Rule
- Buy a stock at ₹100.
- Set a stop-loss at ₹93 (which is 7% below ₹100).
- If the price drops to ₹93, exit the trade without hesitation.
- Do not wait for the price to “recover” unless the fundamentals or charts strongly support it.
When to Use the 7% Rule
- While trading or investing in short-term opportunities
- For volatile or momentum stocks
- When entering a new position without strong conviction
- During uncertain market conditions
When You Might Skip the Rule
- For long-term investing in fundamentally strong companies
- If you have done deep research and believe in the stock’s future
- When you’re using other risk-control methods like hedging or diversification
Alternatives to the 7% Rule
- 5% rule for conservative traders
- 10% rule for aggressive or high-volatility setups
- Trailing stop-losses based on moving averages or ATR
Final Thoughts
The 7% rule is not a magic formula, but a powerful tool to help you trade with discipline and protect your capital. It works best when combined with sound stock selection and a well-thought-out trading plan. Use it as a guide—not a strict law—and adjust it based on your trading style and risk appetite.
Frequently Asked Questions (FAQs)
1. Who created the 7% rule?
The rule was popularized by William O’Neil, founder of Investor’s Business Daily, as part of his CAN SLIM strategy.
2. Does the 7% rule apply to intraday trading?
It’s more relevant to short- or medium-term swing trades. Intraday traders usually use tighter stop-loss levels.
3. Can I adjust the percentage based on the stock?
Yes. Some traders use a range between 5–10% based on volatility and stock behavior.
4. Is this rule helpful for beginners?
Absolutely. It helps beginners avoid emotional mistakes and learn disciplined trading habits.
5. Should I always exit at exactly 7% loss?
Use it as a flexible guide. The key is to have a plan and stick to it with minimal emotions involved.