Holding Cash When Trading

Holding cash, those are the words that most traders don’t want to hear. Everyone wants to e fully invested into the market at all times. That is a mistake, sometimes the best thing you can do is to be out of the market all together.

Two of the most successful stock market traders of all time, Warren Buffet and Jessie Livermore have gone through long periods of holding cash. They only buy when things are worth buying. That is what has made them so successful.

This is directly opposite to what most new traders do. They feel the need to be fully invested in the market at all times, after all if they are not fully invested they are losing potential profit. This type of thinking comes from the belief that the market only goes up; if that were the case then holding cash would be a bad idea.

However the stock market can be a double edged sword. You can make a large amount of cash during the good times but you can lose a large amount of cash during bad times.

First and foremost you want to protect yourself from losses. The best way to do that is to hold cash when you are unsure of the market’s direction. Waiting for the markets to make up their mind instead of trying to trade a bad market will help you to preserve your capitol, so you still have it to use when the markets return to a money machine.

Another reason why being out of the market can be a good idea is that it is less stressful and allows you to take a break. When the markets are constantly moving up 500 points then down 500 points during the same day you probably want to take a breather until the markets make a decision.

Wait it out and take a break. Forget about the markets for a while, at least until they start trending. The way I see it, volatile markets happen as a way to tell you to take a break. If you trade too much during hard times you will be too stressed out to make a profit during a trending market, and you will probably make less money in the long run as well.

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