Mark D. Wolfinger is an experienced options trader who kindly offers his expertise to others. His blog, Options for Rookies, has excellent advice about buying and selling options, including information on doing spreads like condors and collars–strategies I don’t use because I am a seller of put options.
Recently, he has made the following comment on his blog about recommending trades, which applies not just to options but also to all trading:
As you know, I NEVER recommend a trade. That violates one of my core beliefs:
When someone sells a trade recommendation, the advice seller probably believes the trade will be profitable. However, ultimate profitability is not only dependent on the trade chose, but also depends on how it is managed. That salesman may be able to turn a profit, but that does not mean that you would. Your pain threshold is lower and there would be many instances in which you exit with a loss and he holds and earns a profit.
He claims a profit for his followers and all you see is a loss. Do you understand why that happens?
Each trader has his/her own comfort zone, trading goals and the ability to withstand a loss. Each would exit the trade at a different time. Each is at a specific point in life – perhaps raising a young family or retired. Perhaps wealthy or struggling. No one who understands trading would suggest the same trade to every person. Yet, that’s what these gurus do.
The post in which these lines are found is called, “Risk Management for the Small Trader” in which he recommends that options trader have a minimum of $10,000 trading cash and preferably twice that amount because the newbie with $5000 or less will have just enough cash to enter positions but insufficient cash to manage them well.
His advice about the management of trades applies also to stocks. If new traders, who enter a stock with the hope that it goes up quickly, sell it when it goes down 15%, they will likely lose that cash forever. If they average down, and I believe in such a strategy, then they will be much less likely to lose money as a trader–even the black swan event of the market drop of 2008-2009 could have been overcome with a strategy of averaging down on losing positions. But alas, if you have only a limited amount of cash, then that strategy won’t work, because you shoot your wad in the first instance, and there’s nothing left with which to average down.