The 7% rule is a risk management strategy used by traders and investors to limit losses on individual stock positions. The rule states that if a stock falls 7% or more below your purchase price, you should exit the trade to prevent further losses.

Why 7%?
Prevents Emotional Decisions: By setting a fixed exit point, traders avoid holding onto losing positions, hoping for a rebound.

Protects Capital: A 7% loss is manageable, whereas larger losses require exponentially higher gains to recover (e.g., a 50% loss needs a 100% gain just to break even).

Based on Historical Volatility: Many professional traders (like William O’Neil, founder of Investor’s Business Daily) found that stocks breaking below 7-8% often continue declining.

How to Apply the Rule?
Set a Stop-Loss: Place a stop-loss order at 7% below your entry price.

Avoid Averaging Down: Don’t add to a losing position; stick to the rule.

Adjust for Volatility: For highly volatile stocks, some traders use a wider stop (e.g., 10%).

Limitations
In highly volatile markets, a 7% stop may trigger prematurely.

Long-term investors may prefer percentage rules based on portfolio risk rather than individual stocks.

The 7% rule helps traders stay disciplined and preserve capital, key to long-term success.