Cash buffer
Why do traders keep part of their capital uninvested, and what does holding it let them survive or do?
In plain words
A cash buffer is capital deliberately left uninvested rather than deployed in positions. It is held ready to meet margin calls, cover losses or fees without selling assets at a bad moment, and to fund a position when prices fall sharply and an opportunity appears.
Why it matters
Markets can move far faster than positions can be adjusted. Without spare cash, a sudden drop forces a sale at the worst price or a forced closure of the position. A buffer converts a bad week into a survivable one and keeps options open when few others have them.
In a real week: ETH, week of 8 October 2018
In the week of 8 October 2018, ETH fell 12.93%, closing at 197.01, in the lower third of its range. Its worst day was -15.49% on 11 October, with a largest hourly move of -5.79% at 01:00 UTC that day, and the low of 189.01 came late on 11 October after the high. Volume was 0.46 times its prior 12-week average, labelled below that average. The week's high of 232.70 and low of 189.01 gave a range of 23.12%, the scale a buffer would be sized against.
A common mistake
Treating cash as money earning nothing. Its value is optionality: it pays for margin pressure during a fall and lets a buyer act when prices and other holders are under stress.