In the volatile world of markets, it is cut loss Stop loss is an important strategy to minimize investment losses. Stop loss requires flexibility and decisiveness from the investor to determine a reasonable stop loss point when the transaction does not go as planned. In this way, the investor can protect the investment capital and minimize the risk in the uncertain market environment. Applying a stop loss strategy intelligently is the key to success and stability in stock investment.
1. Introduction to stop loss in stock trading
Stop loss, or cutting loss, is the investor's automatic closing of a position or transaction at a specific price, accepting a loss when the market fluctuates in a way that is not as predicted. By applying stop loss, investors can control risks and protect their investment capital from unwanted losses. This increases the flexibility and safety of the trading strategy, helping to optimize investment results in a volatile market environment.
Stop loss is an important principle in stock investment, helping investors protect capital and control risks. Instead of waiting for the stock price to recover to sell, stop loss allows investors to look for new opportunities after accepting a loss. The stop loss method can be based on the percentage of price decrease or when the price breaks through an important support area. Determining the stop loss point is often based on technical indicators such as the MA average or trendline.
The main reasons why you have to cut your losses are:
- Decreasing investment account: When a stock price falls and shows no signs of recovery, selling to recoup capital is an effective way to cut losses. This prevents you from continuing to lose more and protects your capital.
- Asset restructuring: When a portfolio has a stock that causes a large loss, cutting losses and finding a new stock is an effective way to restructure assets to minimize risk.
- Exceeding the stop loss threshold: Some investors accept a fixed level of risk and are willing to sell stocks when their portfolio reaches a set loss threshold, to avoid larger losses.
- Choosing the “wrong” investment stocks: Choosing to buy stocks from reputable and transparent companies is a way to “insure” your investment assets. However, if you choose the wrong stocks, cutting your losses and switching to stocks with better potential is a wise move.
2. Why should we cut stock losses?
Failure to cut losses in time can put your initial capital at risk. Some investors, overconfident or stubborn, tend to ignore small fluctuations and disregard small losses. However, as Marty Schwartz, the “Wizard of Wall Street,” once said, “The most important thing in making money is not to let losses get out of hand.”
Even if the loss is only a small percentage, it should not be taken lightly. Cutting losses is necessary in volatile market environments, when even strong stocks can fall sharply. This is especially important when a business shows signs of decline or when an investor sees a better investment opportunity.
If they do not cut their losses in time, investors face two main consequences: unstable psychology and gradual loss of capital:
- When choosing to buy a stock, every investor hopes for profit. However, when the market fluctuates and the stock price falls, they face a difficult decision: continue to hold or sell, accept the loss or hope for the price to recover. Constantly monitoring price fluctuations can have a strong influence on investors' psychology. When faced with high risks and large losses, they can become quiet and lose confidence, easily collapse and give up.
- Especially for new investors (F0), losses are inevitable. Usually, when they encounter losses, they will tend to add more capital and increase trading volume, but if the market is unstable, the consequences can be huge.
- Stock players must closely monitor the negative percentage every day to see the results of their investment. In case the negative situation persists, it is necessary to cut losses promptly to preserve capital and "return to shore" safely. Therefore, cutting losses as soon as possible will avoid more risks and protect the initial capital.
What if the market really doesn't like your stock and selling pressure causes the price to split in half? To recover your loss of 50%, you would need to make a profit of 100% on your next investment to get back to your original investment. How many stocks did you pick that doubled in price in the last year?
| Loss level | The level of profit required to return the principal |
| 8% | 8,7% |
| 25% | 33% |
| 30% | 43% |
| 40% | 67% |
| 50% | 100% |
3. Principles of stock loss cutting
There are many ways to cut losses in stock trading, but the most important thing is that each investor needs to set a stop loss rule that suits him or herself. This depends on each person's individual approach and personality, including thinking, patience, risk tolerance, and many other factors. Determining a loss limit will help you cut losses in time when necessary.
However, you don't have to wait until a stock drops to its limit to cut your losses. It's important to have a specific plan and recognize when you're making a mistake, so you can minimize your losses as soon as possible. Even if you're making a profit and feel safe, it's smart to close out an investment to avoid potential risks.
Think of losses as insurance on your stock market investments. Even if the stock price increases after you sell, there is no reason to regret it. Your ultimate goal is to keep your losses safe so that you still have money to invest in other opportunities with better potential.
Stop "holding losses" to avoid pressure and look for better opportunities.
To determine the stop loss point in stock trading, investors often apply the following methods:
- Use moving average (MA). This is a technical tool that helps investors track the overall trend of a stock's price. By tracking whether the price reaches a support or resistance level, investors can determine where to stop losses. Common MA lines are MA9, 10, 20, 50, 100.
- Use trendlines to identify support or resistance zones. If these zones are breached with high volume, this may indicate a change in the stock’s trend. In this case, investors should place a stop-loss order just below the key support zone to protect capital.
- Use stock management technology applications: If investors lack experience, they can use management technology applications provided by professional securities companies. Automatic stop-loss orders in these applications help remove the emotional element from trading decisions and minimize the risk of further losses.
- Use a stop loss order just below the key support zone. When the price crosses this level, the order will trigger a sale of the stock, helping the investor recover money and minimize losses.
Source: Onstocks
