Sunday, December 7, 2008

Holding Cash When Trading

Holding cash when trading, those are the words the majority of traders fear. No one wants to do it, but it can actually be a benefit to you.

Two of the biggest stock market geniuses of all time, Warren Buffet and Jessie Livermore have always gone through long periods of holding cash. They only buy when there are positions out there worth buying, and when everything seems to be going in the right direction.

This is directly opposite to what most new traders will 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 can be a downfall.

Remember that 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.

Your first goal should be to protect your losses. The best way to do that is to hold cash when you are unsure of the markets. Waiting for the markets to make up their mind instead of trying to trade a bad market will help you to preserve your capitol.

Another reason why holding cash 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. 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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