7% Rule To Avoid Stuck In A DownTrend.
After going throughTiger Post’s “Missed a Rally or Caught up in a Down Trend ”, I had a thought over.
Apply the concept of “lesser of the two evils”, my ultimate decision is I rather missed a rally than get caught in a down trend.
Missing out (to me) implies:
Due to “ill timing or whatever reason/s”, no investment has been made before market took off.
It also means no monies were lost in the process, albeit no gain also.
Personally, I think there is no right or wrong answer to the situational scenario. But is it true that there are only two options available?”? I beg to differ.
I researched further on the other option “caught in a down trend” that I did not select.
And I found a stop-loss solution article (see below).
Gist Of The Post:
Sitting on losses is never a good strategy.
This is because losses can pile and snowball very quickly.
Even blue-chip stocks can dive and give up all gains from a buy point in a single session.
As an “astute” in-learning investor, we owe it to ourselves to:
Watching for sell signals.
Learn to “know” - how to sell stocks is vital to investing.
There are different ways of finding topping signs.
Chart analysis offers a clear clue through IBD's 7% sell rule.
This is a simple & effective way of cutting 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. Meaning, 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.
Investment Mantra - “Deeper a stock falls, Harder it is to get back to break-even”.
Examples:
A drop of -7% takes a +7.5% gain to fully recover.
A drop of -20% takes a +25% rebound to fully recover.
A drop of -30% takes a +42.9% bounce to fully recover.
Note: The “gain / rebound” percentage is not directly proportional to multiples of the losses.
The 7% stop loss applies to any stock purchase, at any level:
Assuming, an investor bought a stock at $45.
And the buy point was at $43.
Applying the 7% sell rule means taking the $45 purchase price as the base.
“Beauty” In Selling Stocks & Retail Investors’ Advantage.
The 7% sell rule is one of the tools - nimble investors have that larger funds holding massive positions over a wide range of stocks may not.
IBD founder, William O'Neil would point out that it is "a terrific advantage" that nimble & decisive individual investor has over the institutions.
$Meta Platforms, Inc.(META)$ as illustration.
On 30 Aug 2021, shares of Meta Platforms broke out of a flat base with a buy point of 377.55.
This is item (1) in above diagram.
Volume was lower than average.
A watchful investor would have been “alerted” by the fall in volume traded.
Yet, Meta share price rose to $384.33.
Before started to fall quickly.
On 20 Sep 2021, Meta fell below its 50-day moving average (ma); first sign of trouble.
This is item (2) in above diagram.
On the same day (20 Sep), Meta fell as low as $349.80.
*Note: When the 7% rule is applied, investor should sell when Meta fell to ($377.55 x 0.93); $351.12 per share.
Assuming, investor did not sell.
On 22 Sep 2021, Meta gapped down. By then the 7% loss was quite clear.
Assuming, still investor did not sell out.
By November 2022, Meta shares have fallen to $88.08 per share.
That’s a -77% loss from 30 Aug 2021 entry.
Fast Forward to today:
Despite Meta’s +153.33% YTD gain, it has not to get back to its August 2021 share price level.
This means investors who are still holding onto the shares are still waiting to break-even.
For “bold” investors who sold in September 2021, would’ve the capital to get back into the stock for this year (2023) rally.
We all need a moment for this “logic” to sink in. Deep Breath.
How To Sell Stocks: Market Conditions Matter
The 7% sell rule holds true in bull markets.
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.
How I See It!
My Afterthoughts:
This is one lesson that I really need to learn (by heart) and apply it: to my future purchases.
Another factor to look at will be the trading volume. Need to remember to always look at this from now onwards (for me!).
One unmentioned assumption author has made is that it’s a “blue-chip” stock that has been purchased.
For my massive paper-loss stock eg. $Bionano Genomics(BNGO)$ purchased - as a result of “willing innocent misled” by Ms Wood; it is still languishing. It would be “foolish” to cut losses now. I am still waiting for breakeven day? LOL!
Do you think this strategy is useful and important?
Do you think you will learn to apply it as well?
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Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
With Meta's continued dominance in social media and the advertising market, future monetization of Whatsapp, Reels and Threads, innovations around AI and the metaverse and future innovations do you all think Meta could one day hit $3000?
Great ariticle, would you like to share it?
Rating is very important (to me).
Will u consider "Follow me" & get firsthand read of my daily new posts? Tks.
How about adding more stock with averaging out?
It can be difficult to be patient when you're in a downtrend, but it's important to remember that markets don't go down forever.
Shorts have to cover today margin interest to borrow is too expensive and all the puts will expire worthless bringing the price over 330.00 before close
I think Stop-losses are an essential tool for traders who want to avoid getting stuck in a downtrend.
marching to $1T market cap. So buy now or else.
Buy and hold $400+ by end of year!!!
Meta $828B is surpassing Tesla $828B.
Told you shorts, META doesn’t usually go back to fill the earnings gaps.
Meta will not going to disappoint who bought at pre market yesterday
META just consistently goes up. Almost like getting a money back guarantee lol