cash balance in a trading account

W

Wil Klem

Starting out with paper trading, I am confining myself to covered calls and long stocks only. I don't believe I will be allowed to enter other positions as a newbie in a new account once i begin to deal with real money. With that in mind, I am wondering about cash balance in a real world trading account.

I see two different mindsets:
  • Maintain a cash reserve (50%?) to allow for future opportunities before existing positions are closed or to close existing positions if the market turns against me.
  • Attempt to stay nearly fully invested (provided that the markets are in my favor) to maximize potential profits. I do understand that I need to be constantly aware of risks and providing exits to minimize losses.
Which of these mindsets is more viable in real world trading?

Thanks for all replies and advice.
 
View over all Market ie DOW / Nasdaq for Bullish or Bearish

If Market is Bullish, then 66% Longs, 34% Shorts and Vice Versa.

Study Sectors, look for a Bullish Sector and Bearish.

Trade pull backs long from the bullish sector, and shorts from the bearish sector.

I'd run at about 80% of the margin maximise profits.
 
As a newer trader myself I've actually found better results in keeping my open trade counts down. This could be more of a psychological thing. I found when thinking I needed to be fully invested I almost seemed to be forcing setups.

I swing trade off daily charts just for some background information.

The other issue I didn't notice through backtesting was how correlated trades can get. Only been love trading since early fall last year.

For instance I would have 5 trades on and each at 1 percent of my capital at risk, then if market didn't like what Fed was saying or oil took a nosedive, theirs a good chance those 5 setups will all go the the same direction and taking a 5 percent loss of trading Capital in a week can be more then you expected.

This is why I just look for better setups. Maybe some recent news or something fundamental is feeding the trend, or a stock that's behaving differently then it's sector, etc.

Helped me anyways with my discretionary system and handling the equity swings. Could just be the current markets I'm observing since I've been trading but it seems like when bad news comes out the whole boat rocks together.
 
Thanks for your replies.

I don't mind managing 10-20 open positions at a time while paper trading for experience before entering the real marketplace. My current mindset is to find and open a few positions at a time which look profitable and provide what appears to be reasonable exits if necessary.

The 80% recommended by Turveyd is the kind of recommendation I was seeking. Understanding that too little invested in favorable market conditions limits potential profits, and having too little cash available because of being heavily invested (as related to cash reserves) prevents entering opportunistic positions has the same result, I have been searching for a reasonable balance. Don't get me wrong. I have no compulsion to be fully invested just for the sake of being fully invested.
 
Wil Klem said:
Starting out with paper trading, I am confining myself to covered calls and long stocks only. I don't believe I will be allowed to enter other positions as a newbie in a new account once i begin to deal with real money. With that in mind, I am wondering about cash balance in a real world trading account.

I see two different mindsets:
  • Maintain a cash reserve (50%?) to allow for future opportunities before existing positions are closed or to close existing positions if the market turns against me.
  • Attempt to stay nearly fully invested (provided that the markets are in my favor) to maximize potential profits. I do understand that I need to be constantly aware of risks and providing exits to minimize losses.
Which of these mindsets is more viable in real world trading?

Thanks for all replies and advice.
More...
In my options portfolio I like to keep my available capital at 70-80%. It gets much lower than that when I have to extend duration depending on what system I'm trading.
 
I don't see any scenario in which I would deal with margin accounts or expiration dates greater than 50 days in the future. Also, I will be staring with a maximum $50,000 account balance (realistically, more like $35,000-$40,000). How would cash reserves of 20-25% of total account work out for both safety and opportunity?
 
Wil Klem said:
I don't see any scenario in which I would deal with margin accounts or expiration dates greater than 50 days in the future. Also, I will be staring with a maximum $50,000 account balance (realistically, more like $35,000-$40,000). How would cash reserves of 20-25% of total account work out for both safety and opportunity?
More...
It has a lot to do with your strategy. Can you give me more info about that? If I have a better understanding I can put myself in your position and see what I would do.
 
  1. long stocks with perceived short term price increases (for potential covered calls in the future with greater profits and/or capturing dividends) and covered calls only
  2. some bias toward stocks paying dividends where record date and ex-dividend date fall within the term of the contract
  3. expiration dates in the range of 10-50 days
  4. no naked short positions
  5. discount online trading with low commissions ($4.95 for stocks and $0.50 for options) regardless of the number of identical stock shares or option positions executed at the same time
  6. occasionally take advantage of a trading opportunity in which profitable assignment may occur in a few days because of price momentum, favorable news, and other factors which I may discover during research (example buy 100 shares XYZ @ $30.78 and sell 5/20 $31 call @ $0.96)
EDIT: spelling error
 
In your long stock positions do you place stops? If so where? In your covered call positions do you place stops? If so where?
I personally don't see to much of an advantage in purchasing a stock ahead of dividends because the stock itself goes down in value equal to the dividend amount.
 
This entire endeavor is a learning process for me.

A brief background may be helpful for you to understand my level of understanding before I address your questions. I have no previous experience in trading vs. investing. I have been paper trading for about 20 days to get a basic feel for things. I have not advanced to greeks, IV, and other topics beyond beginner level yet. My intent is to move on to other topics one at a time to gain a working understanding of each and paper trade using those concepts.

You asked, "In your long stock positions do you place stops? If so where?"
I examine recent charts in light of current news and my perceived range and direction of movement and place a stop loss based on what I feel comfortable with accordingly. If I don't like what I see, I don't buy. As the price increases, I set a trailing stop loss to preserve some of the profits earned. At this point I am unsure of where the best place is. I am using 5-10% below current trading price until I can make a more informed decision.

You asked, "In your covered call positions do you place stops? If so where?"
I calculate breakeven as follows: stock purchase price + commission - option premium + commission - projected dividends (if any). I set stops here to exit all positions and trailing stop loss point as described above.

On both of the above I may elect to close all positions if current news is very negative or breakout of current trend lines goes south prior to reaching stops.

You said, "I personally don't see to much of an advantage in purchasing a stock ahead of dividends because the stock itself goes down in value equal to the dividend amount."
Please correct me if my thinking is flawed. If dividend payment is received, account balance remains unchanged while cash reserves increase. (Yes, I know this is a taxable event.) If assigned after dividend payment, I gain a little more profit. If the contract(s) expire, I see no difference.
 
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