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Adopt A Disciplined Defense: Know, Follow Your Sell Rules

Not everyone appreciates new rules — especially ones that impose clear limits on behavior.

But what if that behavior is cutting into your capital reserves

Sell rules are guidelines that swap order for intuition at times when investor profits tend to be at risk or losses are in danger of further erosion.

Over the next 10 issues or so, Investor's Corner columns will provide a basic primer on essential sell rules to help you sell into strength and near a stock's ultimate peak. Each column will explain what the rules are and how to recognize when stock charts signal them.

These offense-style rules run the gamut from taking profits at 20% to 25% in all but exceptional stocks to recognizing a stalling or faltering winning run.

The columns will get into the fine points of understanding and charting a rising stock's channel lines and recognizing when a stock breaks them. They will offer guidelines on gauging excessive media attention given a winning stock, and put events like stock splits in perspective.

The most basic of sell rules is to sell a stock if it falls 7% to 8% below its initial . It's a good idea to tighten this limit to as little as 3% to 4% when the market is under pressure.

This is known as the golden sell rule. Yet, funds and other large investors generally don't use this strategy because they hold large positions and tend to be spread over a great many stocks.

This is an "advantage that you, the nimble and decisive individual investor, have over the institutions," William O'Neil, IBD's founder and chairman, wrote in "." "So use it.

It's also key to remember, if you use charts to time your buys correctly as stocks clear buy points, research shows your stocks will generally not drop more than 7% to 8% below that buy point.

Another basic rule is to never allow any considerable gain to cycle into losses.

Both of these rules can be difficult to follow when you believe in a stock or when your ego is pushing you to want to be right.

But the desire to be right can be costly. Following sound sell rules limits losses, protects capital, and focuses an investor's energy on his or her strongest stocks.

You can also pick up pointers on sell rules from reading daily articles in IBD's Making Money section. In addition to Investor's Corner, The Big Picture, Stock Spotlight Analysis and Smart Table Review offer regular reminders on many rules.

IBD's subscription-based Leaderboard service, launched in 2011, offers intricate detail on how to apply sell rules to specific leading stocks on a day-by-day basis.

The online IBD University also offers a free, three-part online seminar specifically on sell signals and sell alerts.