Ticker&Tape

Stop-losses: cutting losses short

Every trader is wrong a lot. The difference between surviving and blowing up is how quickly you admit it. A stop-loss is a price, decided before you buy, where you get out no matter what.

Lesson 65 of 76 · 2 min read

The 7% to 8% rule

The method popularized by William O'Neil has one non-negotiable rule: sell any stock that falls 7% to 8% below your purchase price. No exceptions, no waiting for a bounce. If you buy at $50, you are out by about $46.

The math explains why. A 10% loss needs an 11% gain to recover. A 25% loss needs 33%. A 50% loss needs 100%. Small losses are easy to make back; big ones can take years. Cutting losses short keeps you in the game long enough for your winners to pay.

EntryStop 7–8% below entry−7.5%

Never average down

Averaging down means buying more of a stock as it falls to lower your average cost. It feels smart, because the stock is "cheaper". In reality you are adding money to a position that is proving you wrong, and turning a small loss into a large one.

Do the opposite. If you add at all, add to winners that are working, near a proper buy point, never to losers.

Put the stop below a real level

7% to 8% is a maximum, not a target. Often a better stop sits just below a meaningful level: the low of the handle, the bottom of a tight area, or the 50-day line. If the stock breaks that level, the setup is broken.

If the logical stop is more than 8% away, the entry is probably too far from the pivot. Skip the trade or wait for a better spot. Many experienced traders aim for stops of 3% to 5% when they buy right at the pivot.

Volatile stocks and ATR

Some stocks move 2% a day; others move 6%. A stop that is fine for a calm stock may be hit by normal noise in a wild one. Check the ATR or ADR in the data box. A stop closer than about one to one and a half times the average daily range will get hit often by random swings.

The answer is not a wider stop with the same position. Keep the stop sensible and buy fewer shares, so the dollar risk stays the same. That is what position sizing is for.

Making the stop real

Decide the stop before you buy and write it in your journal. You can place a stop order with your broker or set a price alert on the platform and act when it triggers. What matters is that you follow it. A stop you move lower when the stock gets close is not a stop.

Common mistakes

  • Moving the stop lower because "it will come back".
  • Averaging down into a falling stock.
  • Setting a stop so tight that normal daily noise triggers it.
  • Deciding the exit after buying, when emotions are in charge.

Key points

  1. Cut every loss at 7% to 8% at most; smaller is better when you buy near the pivot.
  2. Never average down; only add to positions that are working.
  3. Place stops below real levels and adjust share count, not risk, for volatile stocks.

Check what you learned

Answer at least 2 of 3 correctly to complete the lesson.

1. Why does the method insist on cutting losses at 7% to 8%?

2. A volatile stock often swings more than your usual stop distance in a single day. What is the right adjustment?

3. The logical stop, just below the handle low, would be 11% below your planned entry. What does that tell you?

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