A lot of rookie traders, who have recently taken on to trading and some of those who have been in the market for a decent amount of time as well make the mistake of keeping too much cash in their trading account, fearing that they might fall short on margins and thus would have to pay penalty or fines.
However this doesn’t have to be the case if one knows exactly what he’s doing. Ideally one should keep a tab of his trading activities and know precisely what margins would be there if one is trading in the futures and options segments. Especially people who write calls and also who utilise a trading system for their trades in the F&O segment should take a note of their margins beforehand as well as know how much amount over and above the margins they need to keep in their trading accounts in order to stay safe.
The reason I don’t advocate keeping too much amount in a trading account is that you’re missing out on the interest which you would have made on that money, which is essentially free money that you’re missing out on and it is thus an opportunity loss which is difficult to justify. For traders who play intraday and keep large cash in order to protect themselves from drawdowns, there is no need for them to so do, unless they utilize most of it in their trades. If you’re unsure how much you should keep to be safe and still be able to make decent returns, the answer is the in the quantity you trade and the leverage you use. For a trader who doesn’t leverage beyond 2x, he should ideally keep a predetermined amount based on the value of the futures he’s trading as well as keep the margin for 2x leverage separate. Once you’ve done that, shift the rest of the amount to be used somewhere else and let your money work for you.
If a trader follows strict money management rules and doesn’t go for too much leveraging, stocking his trading account with money just to feel protected doesn’t make sense, for you could be utilizing that money in a much better way. Although some people feel a bit lazy in shifting the money back to their bank accounts once it’s in their trading account, but making the most of your money is what personal finance is all about, for it all add up in the end.
