4) Trading Strategy

What is Cut Loss

Cut loss is the most unpleasant thing to do yet the most crucial skill to master. This is what separates amateur traders from professionals — pros know when to retreat, amateurs hold on until they go broke.

Definition

Cut loss is the act of selling a losing stock to limit losses before they grow larger. It's done when price moves against your prediction and reaches a predetermined stop loss level.

Simple Explanation (Analogy)

Imagine your finger is infected. The nail needs to be cut — painful? Very. But if you don't cut it, the infection can spread and you lose the whole finger or even your hand. Cut loss works exactly like that: temporary pain, but it saves the 'body' of your portfolio from far worse damage. The faster you cut, the smaller the wound.

Indonesian Stock Example

Imagine buying GOTO at Rp 400 with a stop loss at Rp 370 (-7.5%). Price drops to Rp 370 and you cut loss — losing Rp 30 per share. Painful. But the price continued falling to Rp 250. Without the cut loss, your loss wouldn't be Rp 30 but Rp 150 per share — five times worse. Cutting at Rp 370 actually saved 80% of your capital.

How to Use

Determine your cut loss level BEFORE buying the stock, not after. Typically 3-7% below your buy price, depending on the stock's volatility and your trading style.
Set a stop loss order in your broker's system if possible, so execution is automatic. Relying on manual execution means emotions will often prevent you from following through.
After cutting loss, don't immediately buy back the same stock for 'revenge'. First evaluate why your initial analysis was wrong.

Common Mistakes

Moving your stop loss lower as price approaches it. 'Let me just lower my stop loss a bit more.' This is self-sabotage — you're changing the rules mid-game.
Averaging down without analysis. Instead of cutting, you add more — this is fine if fundamentals are strong and you're an investor, but if you're a trader, it's slow suicide.
Feeling like a failure after cutting loss. Cut loss isn't defeat, it's risk management. Even the world's best traders cut losses. What matters is total profit exceeding total losses.

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After understanding this concept, apply it in tools so decisions become more objective and measurable.

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FAQ

What's the ideal cut loss percentage?

There's no universal number. Generally, traders use 3-5% for blue chips and 5-10% for volatile stocks. More importantly: make sure risk per trade doesn't exceed 1-2% of your total portfolio. So if your portfolio is Rp 100 million, max risk per trade is Rp 1-2 million.

What if the price goes back up after I cut loss?

This will definitely happen and it's frustrating. But don't let this experience stop you from cutting losses in the future. In the long run, disciplined cut losses will save you far more than you lose from occasional false signals.