You don't need to hit home runs to win the investing game. Focus on getting base hits. To grow your portfolio substantially, take most gains in the 20%-25% range.
Though contrary to human nature, the best way to sell a stock is while it's on the way up, still advancing and looking strong to everyone.
As IBD founder William J. O'Neil says, "The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again."
So after a significant advance of 20% to 25%, sell into strength. When you sell like this, you won't be caught in heart-rending 20% to 40% corrections that can hit market leaders.
Why 20%-25%?
Typically, growth stocks tend to advance 20% to 25% after breaking out of a proper base, then decline and set up new bases, and in some cases resume their advances.
So in most cases (see the 8-week hold-rule exception), you're better off locking in your gains to avoid watching your profits disappear as the stock corrects. And you can potentially compound those gains by shifting that money into other stocks that are just starting a price run.
By following this disciplined approach, you'll regularly nail down the kind of solid gains that lead to large, overall profits in your portfolio.
The Rule of 72
This simple calculation shows how effective following the 20%-25% profit-taking rule can be.
Here's how it works: Take the percentage gain you have in a stock. Divide 72 by that number. The answer tells you how many times you have to compound that gain to double your money. If you get three 24% gains — and re-invest your profits each time — you will nearly double your money. It's much easier to get three 20%-25% gains out of different stocks than it is to get a 100% profit out of one stock. Those smaller gains still lead to big overall profits.
The table below shows how that works:
IBD LEADERBOARD GIVES YOU A LIST OF SUPERIOR STOCKS, BUY POINTS, AND SELL SIGNALS. GET INSTANT ACCESS TO THIS POWERFUL PRODUCT.
Calculating the 20%-25% Gain
The 20%-25% profit-taking zone is based on the stock's ideal buy point. That may differ from your own purchase price.
As we saw in How to Buy Stocks the ideal buying range is from the ideal buy point up to 5% above that price.
So let's say you bought 2% above the ideal buy point. If the stock then goes up 20%-25% from the ideal buy point, your profit would be 18% to 23%. See the chart below for an example of how this works.
The 20%-25% Profit-Taking Rule in Action
View the chart markups below to see how — and why — you want to take most profits once a stock is up 20%-25% from its most recent buy point.
NEXT TOPIC: The 8-Week Hold Rule
FAQs
Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.
When to take profit options? ›
Generally, it's best to enter into an option position when you expect market volatility to increase and exit an option position when you expect market volatility to decrease. This is because low price movement is not beneficial for an options contract (especially if the option is currently out of the money).
What is the 3 5 7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
When to sell IBD? ›
As IBD founder William J. O'Neil says, "The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again." After a significant advance of 20% to 25% from a proper buy point, consider selling at least some shares into that strength.
What is the best take-profit strategy? ›
Best profit-taking strategies to enhance your trading
- Trend following exits. The most basic of all trading strategies revolve around moving averages. ...
- ATR trailing stops. ...
- Using support and resistance for exits. ...
- Using divergence signals to exit your positions. ...
- Time-based exits. ...
- Candlestick exits. ...
- Fundamental exits.
The 8-week hold rule, developed by Investor's Business Daily (IBD), states that if a stock gains upwards of 20% within 1-3 weeks of a proper breakout, it should be held for eight weeks, as such stocks often become the market's biggest winners.
When should you avoid options trading? ›
7 mistakes to avoid when trading options
- Not having a trading strategy.
- Lack of diversification.
- Lack of discipline.
- Using margin to buy options.
- Focusing on illiquid options.
- Failing to understand technical indicators.
- Not accounting for volatility.
Key Takeaways. With profit-taking, an investor cashes out some gains in a security that has rallied since the time of purchase. Profit-taking benefits the investor taking the profits, but it can hurt an investor who doesn't sell because it pushes the price of the stock lower (at least in the short term).
What is the 11am rule in trading? ›
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
What is 90% rule in trading? ›
The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
What is the 3 day rule in stocks? ›
The 3-Day Rule in stock trading refers to the settlement rule that requires the finalization of a transaction within three business days after the trade date. This rule impacts how payments and orders are processed, requiring traders to have funds or credit in their accounts to cover purchases by the settlement date.
What is the best month to sell stocks? ›
In fact, looking at the chart above of monthly average returns, September averages the worst in the calendar year. As a result, some traders believe that September is the best month to sell stocks.
When to withdraw money from investments? ›
If you need money from your portfolio, when should you take it out?
- If it's a small amount of your portfolio, wait until closer to when you need the money. ...
- If it's a large amount of your portfolio, it's better to have the money ready for when you need it well beforehand.
While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
How long do you keep stocks to earn a good profit? ›
The big money tends to be made in the first year or two. In most cases, profits should be taken when a stock rises 20% to 25% past a proper buy point. Then there are times to hold out longer, like when a stock jumps more than 20% from a breakout point in three weeks or less.
What is the 1 rule in stock market? ›
The 1% risk rule means not risking more than 1% of account capital on a single trade. It doesn't mean only putting 1% of your capital into a trade. Put as much capital as you wish, but if the trade is losing more than 1% of your total capital, close the position.
