How Much Cash Should You Have In Your Brokerage Account?

One of the most important things to establish for any trader is how much money you should keep in your account. While this depends on the type of trading and experience one has, here at YellowTunnel, our strategy is rooted in statistics and statistical analysis- not emotion. What we are looking for, and what most traders aim to achieve, is the highest probability of success with the lowest investment capital. Statistically speaking, you can determine what range a stock should be trading in, and with our neural networks we can also predict the direction. However, it is nearly impossible to predict ‘black swan’ events and therefore one should always be ready with a good trading plan- which includes a defined amount of free cash, we suggest on average 30% of your account should be in cash, in your brokerage account.

For those just starting out, we recommend working with four positions at first, at a maximum loss of 2.5% account value. Depending on market conditions, the amount of money you keep in your account and the cash available will fluctuate. If the market is overbought, for example, consider raising cash. Or, if there is a confirmed bull trend and the market and the market is oversold, consider lowering your cash to buy more stocks or repair your current positions. Determining the stop levels, to help you with trade size, should also be informed by statistical research such as reviewing last week’s low and last month’s low, as well as the 50-100 day moving average. 

Once you are a more experienced trader and can adhere to this cycle, you should be able to grow the number of trades you are managing. The more experience you have, the more confidence you will have in managing these trades. We recommend experienced traders should be able to manage up to ten trades at a time but, as always, remember to adjust cash levels based on market volatility. 

Keeping cash allows you to combat the uncertainty of the market and prepare for volatility. At some point, there will be a correction and if you are able to manage your position number and position size along with the right level of cash, you will be able to withstand the volatility. The number one rule of trading is to make money, and to make money you have to be a consistent trader- consistently disciplined, consistently confident, and consistently profitable.