What is the 7% rule in stocks?

When we talk about investment, calculating the risk is as important as selecting the right stocks. One of the most helpful and advantageous investment strategies that often traders follow is the 7% rule. Let’s know what exactly it is and how it can be advantageous for your trading journey.

The 7% rule is a risk management principle that says that investors should sell a stock if your profit gets as low as 7% below their purchase price. The trick behind this rule is to limit your losses on a trade and you can prevent emotions from taking over. Let’s understand this with an example:

If you have purchased a stock at 1000 Rs. and it goes down to 930 Rs. the rule says you should cut your losses and exit at this position.

This strategy is mostly popular among swing traders and position traders, as this helps them in maintaining discipline and protecting their capital. By setting a stop loss at 7%. And you can avoid the hold and hope mentality, where some traders wait for a hope in rebound that might never come. It is advisable that you save your money for the next better opportunity.

Now let’s understand how the rule 7% works in real trading.

How the 7% Rule Works in Real Trading?

Let’s say you have ₹10,00,000 for investment and you decide to invest ₹10,000 in a particular stock. According to the 7% rule your maximum loss on the trade should not go below ₹7000. You should set a stop-loss at 7%. Once the price hits that price you take the exit.

If we collectively see this rule works very well with a proper budgeting and income allocation plan like the 50/30/20 rule.

Let’s learn how

Combine the 7% Rule with the 50/30/20 Rule for Smarter Trading

While the rule 7% protects individual traders, the 50/30/20 rule helps in managing the overall finances in an investment portfolio. Let’s understand the strategy in according to our budgeting strategy:

• 50% of your income should be allocated to essential expenses like rent, groceries, and utility bills.
• 30% of your income can be reserved for lifestyle choices — such as entertainment, dining out, and personal hobbies.
•  And, the last 20% of your income you save in savings and investments like trading capital.

By combining both the rules together, you can control your risk at both the trade level and the personal financial level. This dual strategy makes sure that even if some trades do not go in your favour, your financial foundation remains solid.

Final thoughts

The 7% rule in stocks is a simple yet powerful way to manage risk in trading. It’s not about being right all the time, it’s about minimizing damage when you’re wrong. Combine this with the 50/30/20 rule to not only trade smarter but also build a stable financial future. So, the next time you place a trade, ask yourself: “What’s my exit plan?” because smart traders don’t just focus on profits; they protect themselves from losses too.