I could literally list thousands of quotes on why at times it is important to stand aside, why you need to know when it is best to do nothing and to stay in cash when the market is not conducive to trading big or trading at all. In my opinion it simply comes down to the following: You need to know yourself very well. Know about your strengths and weaknesses. Put another way: There’s a time to be aggressive and there’s a time to be defensive. I recently quoted Brett Steenbarger. I wanted to explain why I chose that specific quote as the true meaning of the quote might have gone unnoticed:
It’s making the most of strengths and learning how to work around shortcomings that produces optimal performance results. – Brett Steenbarger
The point he wants to drive home is that focusing on your strengths is a better use of your time as opposed to focusing too much on your weaknesses. Put another way: You will make more money if you focus on trading set-ups during market environments that are conducive to your type of trading and your personality. Trying to trade aggressively during other times is akin to trading situations and set-ups you are not good at. You guessed it. It means you are focusing too much on your weaknesses. The solution is to admit one’s shortcomings. The earlier you do that and the more honest you are when it comes to gauging your strengths and weaknesses, the better your results will be in the long run. That’s why I like the following quote:
Have the courage to say no.
Have the courage to face the truth.
Have the courage to do the right thing because it is right.
– W. Clement Stone
Why do I stress all those things? I typically get a lot of feedback when it comes to going to cash or being in cash. Most people have a really tough time understanding that concept. Optimal performance cannot be attained if you are 100% invested in the markets all of the time. “Less is more” is an adage that comes to mind dealing with that issue.
My point is: Selection is key. Be patient. Only trade the best set-ups. Let the trade come to you. When conditions are right go for the throat. If you are always 100% invested you won’t be able to trade that way. In closing I want to quote verbatim what Dan Zanger recently tweeted. Excellent advice indeed:
I have sat in a high percentage of cash for almost 4 months. Not the kind of market to build big positions. – Dan Zanger
The essence of investment management is the management of risks, not the management of returns. – Benjamin Graham