In the world of the stock market, in order to get relatively much profit. Or even to avoid great losses, investor or active trader must know about the term cut loss.
Both investors and traders, both beginners and seniors, often use or apply the term cut loss. Namely, when we sell shares at a price lower than the purchase price, so we experience a loss.
When you have to cut loss, the goal is not to release losses. However, to prevent further losses if the shares you have continue to fall. Here is the explanation, summarizing from Investopedia.
Cut Loss for Investor
Investors and traders certainly have different goals. An investor will cut losses if fundamental conditions change.
“In fundamental we trust,” is a guideline that investors adhere to. So, they buy shares based on the fundamentals of a company.
If the fundamental performance deteriorates and does not allow the price to rise again, that is when investors cut their share loss.
In addition, bad news (not rumors) from a company can also be used as an excuse to cut losses.
Or the possibility of a decline in the JCI, where you should sell all your stock holdings, especially stocks whose movements are easily influenced by the index.
Cut Loss for an Active Trader
Other than an investor, it is also different from an active trader. An active trader will observe the movement of his shares every day. So, if the shares that are owned drop even further, the trader will sell it. This is a cut loss for an active trader.
The key here is to try to find out the direction of the stock’s next movement, whether it will fall further, or sideways, or will it rise again in the not too distant future.
So, what is meant by not too long here is less than a year, or less than a few months depending on your trading period. Because if you hold a stock in a loss position and after a year the stock finally returns to its original price, then you are not losing funds, but you are losing time.
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