When to Sit on Cash

Apurva Sheth
A ship is safe in the harbor but that is not what it's built for. A ship exists to ply the seas, to split the waves, to brave the weather and go to distant ports. In a harbor, ships are almost useless. Out of harbor, they are at risk.

Most traders would think of sitting on cash as equivalent to keeping the ship in the harbor. Your cash is not meant to be stashed away in a safe doing nothing. It's supposed to be out there, braving the markets, taking risks, making you money. Cash in your hand is as wasted as a ship in a harbor.

But does that mean that you as a trader should always be in the markets?

No, there are times when sitting on cash makes a lot of sense.

Just like a sailor maintains a proper balance between safety and risk, you the trader also have to maintain a similar balance. A sailor ventures in to the sea after taking calculated risk and with an objective in mind. But most traders end up trading just for the sake of trading when actually they should have stayed on the sidelines.

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Capital protection is the most important objective of trading. Only after you've protected the capital can you achieve the objective of profit maximization.

Knowing when to trade and what to trade helps you with the goal of profit maximization. Knowing when not to trade helps you with the goal of capital protection.

Sailors keep safety precautions such as life jackets and life boats on the ship. Similarly, traders should use safety precautions - a stoploss to safeguard capital, for example. But having safety precautions in place doesn't necessarily mean you will be able to weather every storm.

Stock markets do not move in one direction always. Even when the broader trend is up, many corrections will occur along the way. These corrections are nothing but consolidations, which are a natural and healthy way for the markets to regain steam.

Consolidations are of two types. One is price based, where the markets give back some of its gains. The other is time based, where the markets becomes range bound before moving ahead.

These time-based consolidations are extremely choppy in nature. And they are very painful for a trader.  Choppy markets generally occur during corrections after a sustained trend, up or down, has already taken place.

Choppy markets have little or no follow-through price action after breakouts or breakdowns. When you get a good signal and enter a trade only for it to immediately reverse and stop you out of the position - you probably entered a choppy market. It's always better to sit out such markets and let a clear direction emerge before making any commitments. 

Avoiding trading in a choppy market helps you in two ways. It helps a trader take a mental break from trading. Such breaks are necessary, especially for day traders or those who trade for a living. Secondly, it helps traders avoid trades born out of impulse, frustration, and revenge. Such trades are almost always a direct result of choppy markets.

Do you think a trader should sit on cash in choppy markets? Share your views in the Club or share your comments here.

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4 Responses to "When to Sit on Cash"
03 Sep, 2015
Almost all pundits are sermonising after the crash, 'well, there are times when it is good to stay in cash', with the benefit of hindsight. Infact no one is explicitly saying whether correction from sensex 29000 to now, 2 Sep2015, when sensex is at 25500, 'it is good time to invest NOW or not!'. EQM coincidentally, after the crash, surprise surprise, has come up with 'Crash Score'. As a subscriber of EQM from within the member logged in sight, I requested for the report to bbe emailed (why cant they directly make it available, for logged in members to get The Report, by one click on the logged in session, instead of going thru two levels of 8page each rant of Rahul Goel's classic reco "Buy Low, Sell High" or "How Warren Buffet learnt the art of investing from Rahul Goel" et al wise words! Never mind, after subscribing for the umpteenth time for the '5min wrapup', no choice, I aam still to receive "Crash Score" report in my email inbox/spam folder (the right place where Rahul Goel's rant belongs!)/Trash folder?! Coming back to 'sit on cash', back in 2008, whoever bought blue chips or otherwise at the extreme greed zone became fools and capital lost ina shot while there after. So, one would have thought that those who waited with cash on hand till sensex came down to 15000 and was vascillating, there about, for a while and invested heavily, would be singing their way to the bank! Alas, after a brief halt the index went straight down to 8000, making these wise traders lose 50% of their capital, If ever there was a guy at 8000 level, with a lot of cash on hand, he could have picked up even almost randomly any of the 3000 stocks trading at the exchange, in a short span thereafter he would have made at the least 100% profit in less than a month, when the 'correction', started to get 'corrected'! So what is the punt recommended by experts, now, when we are at 25500, with blue chips are available at 50% of the levels a month ago & pink chips are available at 25% of the recent highs, for those with a stronger inner-stomach lining?! Buy now or still sit out?! It is all very well to give good-for-all-times advise like: 1. Buy Low, Sell High, 2. Make sure that you always have cash on hand, so that you can pick quality stocks at cheap valuations. But then it is always difficult to give specific reco, particularly for he experts, buy-now-big-time NOW or dump or get out NOW, for want of hind-sight! When you DO have enough hind-sight, they cant give specific reco either, for well...well...it is too late then!!Like (1)
03 Sep, 2015
Hi Apurva, Thanks for the wonderful article. One should know the general trend of the overall market and trade based on the trend as most of the stock price moves along with the market with few exceptions. Based on this one should know when to be on CoH (Cash on Hand) at these times and patiently wait for a good trade setup.Like 
02 Sep, 2015
Dear Apurva, Almost all your trading propositions have hit stop losses during last two months. Is it because of choppy markets ? If so, as per your article, one should have sit in the sidelines and not attempted to trade during this time.Like (1)
R Vijendra Rao
02 Sep, 2015
YAgree with your views. However, as some of us based on your recommendations confidently trade in F&O. Therefore, even in an erratic / falling market, we shall be happy if your recommend the stocks the prices of which likely to fall further with a Target & SL trigger. Thanks, RaoLike 
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