How to implement a dry powder strategy? (active investing)

While most of us are better off using index funds as our main investment tool, if we do decide to actively pick stocks we ought to have some kind of strategy to determine how much cash we should keep on hand at any given time. On one extreme we are fully invested, which leaves us no power to take advantage of market selloffs and panics. On the other extreme we have too much cash on hand and miss out on the intrinsic compounding of the market as a whole.

How do we find a balance between these two extremes and how does it tie into our perceived valuation of the market at the time?

Holding any cash is a bet that a better opportunity will come in the future, how do we get a feel for this and when do we determine "this bargain is as good as it gets, I'm all in"? Does it come with experience?

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