How to Use the 7% Rule to Spot When It’s Time to Take Profits

Hey traders,

Yesterday, I touched on a strategy I like to use when the market’s experiencing a rally, like we’re seeing right now in October. But I realized I didn’t go into full detail on the nitty-gritty of how it works.

So let’s dive a little deeper…

The whole reason this strategy works is because it’s designed specifically for upward trending stocks. And by “upward-trending stocks,” I mean stocks that are in a strong bullish trend. The kind of trend I’ve talked to you about before.

These kind of stocks show consistent upward momentum over a period of at least 4 months.

These kinds of stocks generally tend to climb, pull back a little, then surge even higher. These are the stocks where the 7% rule really shines.

Here’s the thing: When you’re working with a trending stock, the upward momentum tends to keep them from coming down too hard.

Remember, no stock goes straight up forever. So we can expect these trending stocks to go up and then correct a little.

That’s where the 7% rule comes into play.

Because if a trending stock pulls back by 7% or more from its recent high, it’s often a sign that the upward momentum is losing steam. That’s when I start thinking about taking profits and moving on.

Why 7%? It’s a level I’ve found through years of trading that typically signals a top for trending stocks. A little dip is normal, but when it hits 7% or more, it’s usually a sign that it’s time to consider locking in gains before the trend reverses.

How to Use the 7% Rule as an Indicator

In yesterday’s post, we talked about how you can set a trailing stop on a stock you own.

But if you’re selling puts or credit spreads on a trending stock, you can still use the 7% rule.

Just instead of setting a trailing stop, you’d set an alert or keep an eye out for when the stock drops 7% from its recent high.

At that point, consider moving on and finding another stock with stronger upward momentum to continue your income-generating plays.

When NOT to Use This Strategy

Now, let’s be clear: This strategy is not for every stock you own.

If you own a stock for other reasons — like holding it for its dividends or as a long-term investment in a particular sector — this 7% rule may not be the best approach for you.

This rule works best for stocks you’re trading in the short to medium term — when you’re looking to cash in on quick moves and ride a strong trend higher, while protecting your downside.

Use it correctly, and this 7% rule can be your guide to knowing when the tide is starting to turn — and when it’s time to cash out or move on to the next opportunity.

Trade well,

Jack Carter

P.S. Nate Tucci’s had his eye on massive selling by company insiders. But he’s not panicked. Here’s his plan to harness all that extra volatility.

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