Keeping cash reserves is crucial to survival

It all depends on your trading style, plan and strategy. If you are a long term investor buying dividend stocks for a long haul, it probably doesn’t matter if you use all your available cash.

If you use margin however or trade options, I learned that it is a very important thing to maintain some free cash in your account. That free cash or buying power protects you and allows you to make adjustments to your trades.

I learned this the hard way during stocks sell off a couple of weeks ago, when TASR suddenly dropped significantly down, my tiny cash reserves (around 3% only) quickly evaporated due to constantly changing maintenance and I had no chance to adjust my trades to get out of the mess. I also faced a margin call.

A margin call puts you into involuntary trading where you are doing what others want and not what you want or should do. You are completely exposed to a mercy of the market. And your broker.

Fortunately, I had a few winning trades which I could close to raise cash and avoid a complete disaster. But I failed to learn from it and yet again I opened new trades sending my cash reserves to 1% level.

Very irresponsible playing with fire. If the market strikes again I will be caught with my pants down unable to react. I know the rule and advice of many experienced options traders about keeping free cash in reserves, but I failed to follow that rule.

It’s time to change it and increase cash at 30% (my very original rule) and keep it in there and trade with the rest. I even started tracking it and I added it to my options evaluation spreadsheet to see that I cannot open new trades when I am below 30% threshold. That 30% free cash can only be used for trades adjustments and no new trades at all.

As of this writing I raised my free cash to 5.27%

I know, way below and long way to go to raise it up above 30%. It’s time to fix my finances in my trading account. A money management is a very important party of any trader. So I should not neglect it.

What about you? Do you keep some cash in reserves for great opportunity which may show up or for repairing disasters? If so, how much cash do you hold?





4 responses to “Keeping cash reserves is crucial to survival”

  1. Fast Weekly says:

    I think cash is one of the most important parts of my portfolio. It provides me with opportunities. My cash percentage fluctuates, but it’s always over 10%

    -Bryan

    • Martin says:

      Bryan, I agree and I am glad you see it that way too. I was neglecting it lately and have to increase my cash instead of using it. It can be harmful if trading on margin.

  2. I like to keep under 1% cash in my portfolio . If a large opportunity arises I will tap into my huge margin account until I can cover the purchase.

    • Martin says:

      AG, it is good that you have a real cash + margin. I consider my 30% margin included, so total buying power, not just pure free cash.
      Thanks for stopping by.

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