Stock prices do not always move as predicted. When prices fall, it does not necessarily mean you should sell immediately. However, allowing a losing position to continue without limits can also increase the risk of loss.

Therefore, investors need to set a risk limit so that losses do not grow larger, one way being through cut loss. So, when is the right time to cut loss on a stock? Keep reading to find out the answer. 

What Is Cut Loss?

The Financial Services Authority (OJK) explains that a capital loss occurs when an investor sells a stock at a lower price than the purchase price. To anticipate larger losses, investors can set a risk limit before carrying out a transaction.

Cut loss is a strategy of selling a stock when its price reaches a predetermined loss limit. In this way, investors can stop a losing position and preserve capital so that it remains available for the next opportunity.

Why Is Cut Loss Important in Stock Trading?

Stock cut loss helps traders limit losses when price movements do not go according to plan. In addition to protecting capital, a loss limit also helps traders remain disciplined in following their trading plan. As a result, sell decisions do not arise merely from panic at seeing a stock price decline. 

How to Determine a Cut Loss Limit?

Consider the following points so that the loss limit suits the condition of the stock and your capacity to bear risk:

• Purchase Price: Use it as a starting point to determine how much of a decline can still be tolerated;

• Support Level: If the price breaks through the support area, reevaluate your stock position;

• Stock Volatility: Fluctuating stocks require different room for movement, so avoid using the same loss limit for all stocks;

• Risk Tolerance: Adjust the loss limit to your capacity and risk profile so that decisions remain measured.

A Simple Example of Stock Cut Loss

For example, you buy a stock at Rp1,000 per share and set a risk limit at Rp900. When the price falls to Rp900, you sell the stock to limit the loss.

If the price continues to fall to Rp800 and you do not sell, the loss will grow larger. This example shows how a risk limit helps preserve capital when prices move downward.

Does a Price Decline Always Mean You Have to Cut Loss?

If the decline is merely a temporary correction and the company's fundamentals remain strong, the position can still be held according to the investment strategy. Conversely, if fundamental conditions change, cut loss may become a consideration. Therefore, decisions should follow analysis and planning, not merely panic at seeing a price decline.

Mistakes to Avoid When Doing Cut Loss

To keep sell decisions effective, avoid the following mistakes:

• Not setting a loss limit from the outset based on analysis and risk tolerance;
• Continually lowering the risk limit in the hope that the price will rise again, causing losses to grow larger;
• Using the same limit for stocks with different levels of volatility.

Make the Loss Limit Part of Your Strategy

Cut loss is a strategy for limiting losses in trading. This plan forms part of risk management that runs alongside stock analysis, profit targets, and capital management so that every transaction has a clear limit.

Ultimately, preserving capital means preserving the opportunity to make the next decision. Let's manage stock transactions in a more focused way through Growin’ by Mandiri Sekuritas and determine an investment strategy that suits your goals!

FAQ

1. Is cut loss suitable for all types of stocks?

Not always. Its application needs to be adjusted to the strategy, stock volatility, investment objectives, and risk tolerance of each investor.

2. Can cut loss be used in long-term stock investing?

Yes, especially if the company's fundamentals change or the original reason for investing is no longer relevant.

3. When does a cut loss limit need to be reevaluated?

When fundamental conditions, volatility, or the original reason for buying the stock change. Evaluation should be carried out based on measurable analysis.

4. What should be done after a stock cut loss occurs?

Evaluate the cause of the loss, review the previous strategy and analysis, then use the results as consideration for taking the next position.