It’s a risk management rule often used by stock traders, especially in swing trading, to limit losses on a position. It means you should sell a stock if it drops 7–8% below your purchase price, helping protect your capital and avoid bigger drawdowns. This simple rule can make a huge difference in surviving the ups and downs of the market.
Key Takeaways
- The 7% rule tells traders to cut losses once a stock falls 7–8% from the entry price.
- It’s widely used to preserve capital and avoid emotional decision-making.
- This rule is especially useful for swing traders and momentum investors.
- It assumes you have a clear entry point, position sizing, and a stop-loss.
- Using this rule consistently promotes long-term discipline and reduces account damage from losing trades.
What Does the 7% Rule Mean in Trading?
The 7% rule in stocks is a simple stop-loss strategy. If you buy a stock and its price drops by 7–8% from your entry, you sell it, no questions asked. This rule is popular among traders who follow William O’Neil’s CAN SLIM strategy, a growth-stock investing system that emphasizes cutting losses quickly and letting winners run.
The core idea is: protect your capital first. Even the best traders experience losses. The 7% rule ensures that any single trade won’t wipe out your account or sabotage your long-term success.
Why 7% and not 5% or 10%?
While some traders prefer a tighter stop-loss (5%) or more breathing room (10–12%), the 7–8% range strikes a balance:
- It’s wide enough to avoid being stopped out on normal price noise.
- It’s tight enough to cap damage if the trade goes wrong.
- Historically, O’Neil found that many winning trades never dropped more than 8% below their buy points, while losers often kept falling past that level.
Real-Life Example of the 7% Rule
Let’s say you buy shares of Company XYZ at $100.
- According to the 7% rule, your stop-loss would be $100 × 0.93 = $93
- If the stock drops to $93, you sell the position to limit your loss.
If you had bought 100 shares, your maximum loss is $700, rather than holding on and risking much more if the price keeps falling.
7% Rule: Sell Price Based on Entry
| Entry Price | 7% Loss Trigger | Sell Price |
| $50 | $3.50 | $46.50 |
| $75 | $5.25 | $69.75 |
| $100 | $7.00 | $93.00 |
| $120 | $8.40 | $111.60 |
| $150 | $10.50 | $139.50 |
How the 7% Rule Supports Risk Management
The 7% rule ties directly into proper position sizing and risk per trade. If you only risk 1–2% of your account per trade and combine that with a 7% stop-loss, you’re building a system that controls downside while allowing room for upside potential.
For example:
- You have a $5,000 trading account.
- You want to risk 2% per trade = $100.
- You’re buying a stock with a 7% stop-loss.
- To find your position size:
$100 ÷ 7% = $1,428.57
You can invest up to $1,428.57 in that trade, which might be around 14 shares of a $100 stock.
Psychological Benefits of Using the 7% Rule
Markets move fast, and emotions can cloud judgment. Traders often hold on to losers, hoping they’ll bounce back, only to watch them fall further. The 7% rule helps:
- Remove emotions from decision-making.
- Create a mechanical, repeatable process.
- Avoid the trap of turning short-term trades into long-term regrets.
Cutting losses quickly is what separates amateurs from professionals.
When You Might Adjust the Rule
The 7% rule is not one-size-fits-all. Traders might adjust based on:
- Volatility: For high-volatility stocks, a wider stop may be needed (10%).
- Timeframe: For long-term investors, a bigger cushion may apply.
- Trade type: Options traders or those using leverage may set tighter limits.
Still, for most swing and momentum traders, 7–8% remains a reliable starting point.
Don’t leave your trading to chance. Platforms like Defcofx offer built-in risk tools, stop-loss orders, and portfolio analytics so you can trade smarter and protect your capital automatically.
Open a Trading Live Account3 Risks of Ignoring the 7% Rule
Traders who ignore loss limits often fall into dangerous patterns:
- Averaging down on losing trades.
- Refusing to exit due to ego or hope.
- Getting stuck with underperforming positions.
These habits drain your account and your confidence. Losing 7% on one trade is manageable. Losing 30% because you refused to exit is devastating.
How to Use the 7% Rule Effectively
To make the 7% rule work in real trading:
- Set your stop-loss at the time of entry, not after.
- Don’t adjust your stop just to stay in the trade.
- Combine it with risk-per-trade limits (e.g., 1–2% of account).
- Use tools like Defcofx’s trade calculator or mobile alerts to monitor price movements.
Remember, discipline is your edge.
Final Thoughts: What is the 7% Rule in Stocks
So, what is the 7% rule in stocks? It’s a simple guideline that encourages you to cut your losses quickly and protect your capital, which is the most important thing in trading. Whether you’re just starting or refining your strategy, this rule promotes long-term success by keeping emotions and risk under control.
Every trader faces losing trades. What matters is how much you lose and how fast you respond. By following the 7% rule and pairing it with solid analysis and risk management, you put yourself in a better position to win over time.
FAQs
It’s great for most swing and growth traders. Long-term investors may tolerate larger drawdowns, but for active traders, a 7% stop helps control risk effectively.
The rule became popular through William O’Neil, the creator of the CAN SLIM method. He emphasized selling losers quickly and letting winners run.
Use a hard stop whenever possible. Mental stops are risky; emotions often delay action. Most brokers, like Defcofx let you automate stop-loss orders.
It happens, but the goal is consistency, not perfection. Following the rule means surviving to trade another day with discipline.
Yes, depending on your strategy, volatility, and risk appetite. The key is to set a rule and follow it and don’t move stops after the trade is live.
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