Recently, I received a PM from Facebook and colleagues who emailed me about the cut loss. “Why do we have to cut losses in trading, why don’t we just hold the shares until we make a profit?”
It’s true, and I’ve experienced it myself, that stocks whose price goes down and I don’t sell, I just hold on until the stock price goes up again. The price even went up again and when I sold it, it turned out to be a profit. Try if I cut loss at that time, I will not be able to make a profit instead I lose.
So, if I can say that you can actually hold on to your declining stocks, you don’t need to cut losses. After all, the stock price sooner or later will mostly return to its original price, ESPECIALLY if the stock market is in a state of being bombarded with positive news that causes strong bullishness, usually stocks whose prices fall / are discounted can rise again to their original prices when you buy can even go up even faster.
“Why? you always emphasize to always do CUT LOSS, CUT LOSS and CUT LOSS if the stock price continues to fall beyond the price limit that we have set?”
In some (few) cases, I do advise you to hold certain stocks when the price drops and there is no need to rush to cut losses. After all, if you want to wait a bit for the stock price to rebound, you don’t have to lose, right?
“That means the cut loss is not needed in trading, right?”
If you are reading my post, do not rush to conclude that cut loss is not necessary in trading. Cut loss is still necessary and even MUST. Why? Because cut loss is a form of trader discipline to manage risk in their investment portfolio. If you are a loyal visitor to my website and come across this post: Causes of ‘Stuck’ Stocks: Traders Don’t Want to Cut Loss. So, that’s the reason why the cut loss is very much needed.
There have been a lot of traders who are not disciplined in setting cut loss limits and finally their shares have stuck for years. Let’s say you hold BUMI shares at a price of IDR 7,000 and you don’t set a cut loss limit, suddenly now the price is only IDR 50. Or you hold HRUM shares at a price of IDR 5,000, and you don’t set a cut loss limit suddenly now the price is only IDR 700. If your shares are already stuck, it’s the same as having money but you can’t take it.
Well, in the paragraph above I put bold words: “In some cases, I do advise you to hold certain stocks when the price drops and there is no need to rush to cut losses.” In some cases here the intention is based on your own subjective assessment obtained from the results of your personal analysis, usually done by determining support and resistance lines. In addition, you can see whether the stock is liquid or not, as well as from the company sector.
For example, I like trading in PWON stocks and these stocks are indeed liquid, the support and resistance that are often passed are quite clear. I bought PWON shares at a price of Rp454, I saw that there was support at 445, if it fell below 445, I cut my loss. PWON’s stock price fell to 442, but I believe that PWON’s correction is only temporary because the typical PWON stock is fast rising and falling fast, this stock consistently entered LQ45. So, I don’t do cut loss. And sure enough, the price slowly rose to Rp483. If I cut loss, of course I will experience a loss.
The assessment of whether or not to cut loss is very subjective and if you ask me what the formula is, I will answer that there is no formula. You do have to have stock options for trading that you feel comfortable.
But once again I emphasize here, you still need to apply cut loss in your trading system. I will give you an idea at what time the cut loss is important. For example, the coal mining sector starts to stagnate, and you hold HRUM’s stock at a price of Rp. 5,000 and at that time the price starts to fall, so it would be unwise to expect the price to continue to rise, even though the sector is clearly sluggish. So, you need to secure your portfolio first, considering that the stock in the sector you hold has bad news. How: CUT LOSS, you can sell part of it first.
The importance of cut loss is to minimize the risk of your stock sticking out and minimize even greater losses. And to be able to determine when you should immediately cut loss or hold first, wait until the stock price goes up, you need high flying hours. You need to learn a lot to analyze.