Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever

In the early part of the 20th century, Jesse Livermore was the most successful (and most feared) stock trader on Wall Street. He called the stock market crash of 1907 and once made $3 million in a single day. In 1929, Livermore went short several stocks and made $100 million. He was blamed for the stock market crash that year, and solidified his nickname, "The Boy Plunger." Livermore was also a successful commodities trader.

I think the most valuable knowledge one can gain regarding trading and markets comes from studying market history, and studying the methods of successful traders of the past. Jesse Livermore and Richard Wyckoff are two of the most famous and successful traders of the first half of the 20th century. Many of the most successful traders of today have patterned their trading styles after those of the great traders of the past.

Here are some valuable nuggets I have gleaned from the book, "How to Trade Stocks," by Jesse Livermore, with added material from Richard Smitten. It's published by Traders Press and is available at Amazon.com. Most of the nuggets below are direct quotes from Livermore, himself.

 

1. "All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical (technical) formations and patterns recur on a constant basis."
2. "The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor."
3. Don't take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don't be an impatient trader.
4. Livermore's money made in speculation came from "commitments in a stock or commodity showing a profit right from the start." Don't hang on to a losing position for very long."It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind."
5. "Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes."
6. "When a margin call reaches you, close your account. Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep that good money for another day."
7. Livermore coined what he called "Pivotal Points" in a market or a stock. Basically, they were: (1) Price levels at which the stock or market reversed course previously--in other words, previous major tops or bottoms; and (2) psychological price levels such as 50 or 100, 200, etc. He would buy a stock or commodity that saw a price breakout above the Pivotal Point, and sell a stock or commodity that saw a price breakout below a Pivotal Point.
8. "Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend."
9. A prudent speculator never argues with the tape. Markets are never wrong-- opinions often are.
10. Few people succeed in the market because they have no patience. They have a strong desire to get rich quickly.
11. "I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans -- and human nature never changes."
12. When you make a trade, "you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade."
13. "I am fully aware that of the millions of people who speculate in the markets, few people spend full time involved in the art of speculation. Yet, as far as I'm concerned it is a full-time job -- perhaps even more than a job. Perhaps it is a vocation, where many are called but few are singled out for success."
14. "The big money is made by the sittin' and the waitin' -- not the thinking. Wait until all the factors are in your favor before making the trade."

An important point I want to make is that Jesse Livermore's trading success came not because of any "inside" information or some huge store of knowledge he had about each and every stock or commodities market he traded. Livermore's trading success was derived from his understanding of human behavior. He realized early on that markets and stocks can and do change -- but people and their behaviors do not. Therein lay his formula for trading success. That formula for trading success has not changed since Livermore's hey day in the stock and commodities markets almost a century ago.

A final note: Jesse Livermore may have been called the greatest stock market trader of the 20th century, but I question that notion. Certainly, no one can
disagree that his profits were immense and his trading prowess was unmatched. But his life was not in balance. He was a "workaholic" who paid too little attention to his family. Livermore put a gun to his head and pulled the trigger in 1940. He"crashed and burned." You must have balance in your life to achieve lasting success at any endeavor. Trading markets is no exception.

By Jim Wyckoff

www.jimwyckoff.com

some more words:

funny ('hope-jags', 'thimblerig', 'boodle'), unfamiliar ('call-money rates', 'pyramiding', 'corners'), or disturbingly familiar ('bucket shop', 'whipsawed')


more quotes (which may overlap the first post's):


Knowing your approach: Livermore traded two markets, regulated-broker speculation (including stocks, more "supply and demand"-pure commodities, and commodity options), which delayed prices for trades and commissioned trades, and nonregulated, bucket-shop gambling, which jumped prices to wipe out positions and put a wider spread on some trades.
Livermore's early experience got past most peoples' mm vs. hope/fear difficulties. It was to trade the fluctuations, "traded in and out of season, every day, whether or not conditions were right", at the bucket shops, depending on tape-reading experience to sense the wrongness of any possible price-spiking designed to remove a large group at a certain price.
Livermore's later experience was to speculate in the regulated markets:
"my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.
In short, I learned that I had to work for my money.
I was no longer
betting blindly or concerned with mastering the technic of the game
[p.85] but with
hard study and clear thinking."

The language of "clear thinking" in describing probabilities included
"the decline had discounted the immediate future"
or "wasn't bullish enough to play for a turn".

Speculation with probabilities could go wrong when one
picks the wrong skill: "My position was right but my play was wrong....On the one day I should have invoked the aid of my tape-reading I didn't do it."
picks no skill, instead a feeling: "Now when I had a big profit I wanted to cash in so I could feel I had been right"
or, overvalues one skill (positioning over immediate-fluctuation trading , here): "The rallies had broken me before. I wasn't going to let the next rally wipe me out."


With observing the tape or the chart, patterns and support/resistances emerge.
Patterns reoccur individually
"the longer the delay in starting the break the sharper the break will be when it does start"
and tend to be one after another, if one defines enough of them:
"the whole line was soft as mush. Presently there was a rally and people came to me to warn me that the end of the decline had been reached."

Support/resistance line,
"Therefore the thing to determine is the speculative line of least resistance at the moment of trading: and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.... read the tape to determine the limits of the get-nowhere prices"
, plays on a classic statistics dilemma with the fuzziness of determining the odds in a big trade
"Do you wish to gamble blindly in the hope of getting a great big profit or do you wish to speculate intelligently and get a smaller but much more probable profit?"
because one, in s/r use, often buys dearly and sells cheaply
"'The moment it crosses $1.20 buy it'
'Why not buy it at $1.14'
'because I don't know yet that it is going to go up at all.'
'then why buy it at $1.20? It seems a mighty high price.'
Sometimes the "get-nowhere prices" roll nicely. Livermore got caught in a short watching within an s/r's upward rolls, before trading that break to the good on recognizing the s/r break, and later making this a general rule on selling tops:
"I noticed that whenever anybody sold heavily there was a good reaction. But almost instantly the price would rally and make a new high for the move....it had not rallied as it had... for weeks, as soon as the pressure of the ... selling that had depressed it eased up."

The effect of a given chart / tape reading could work across one or more TF's, symbols affected, or news items of varying size:
"he [the loser] could understand the hunch that was followed by [a happening with widespread effect]....
could understand any deal that involved one stock, on which the tip definitely fixed the movement in advance....
this thing of predicting that all stocks were bound to go down used to exasperate him. What good did that kind of dope do anybody? How ... could ... tell what to do?"


Finally, when studying more deeply for a "diagnosis", Livermore advises to watch a symbol to see if it acts in accordance to your observations:
"If a stock doesn't act right don't touch it; because, being unable to tell what precisely is wrong, you cannot tell which way it is going."

"Don't take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don't be an impatient trader."

"The big money is made by the sittin' and the waitin' -- not the thinking. Wait until all the factors are in your favor before making the trade."


What did he wait for?

What are the factors he used?

Are there specifics?

There was a recent SFO article about Livermore. Trading FX Like Jesse Livermore Traded Stocks
March 2009 By Jamie Saettele

yes there is and Livermore has written about them. There are several factors but I take it you're only interested in entries. Well for entries he used the pivotal point. How did he calculate the pivotal point?

He's given details on how to maintain records and determine pivotal points in the last chapter of his book "How to trade stocks" published in 1940. The chapter is titled the Livermore secret market key.

You need to read the book as I can't explain here there are a number of rules for tabulating price movements to ascertain pivotal points. He used these pivotal points for entry

you can find the book available for free at wikipedia as the copyright has expired

Thanks for the wiki information.

Hi!
I can't open the link on wiki fo the book. Is this link still active? Can i get it somewhere else?
Thanks

Nice posts guys.
.

I have read the book and its entertaining, but I dont think its applicable to todays trading. The markets are totally different so dont read it expecting it to make you a better trader, unless you are a complete newbie and advice like "let your profts run" is news to you.

here's the link for download, this web site helped me a lot finding stuff for free lol

http://search.4shared.com/network/se...o+trade+stocks

Can you elaborate the point that how markets are totally different?

I mean are you saying that FX and Stock markets are different?

I don't completely follow him but i like his idea of buying at new prices with the trend.
.

There are now lots of comuters trading against you.

I can't see anything wrong with it although we have more liquidity.

And Btw there is nobody against you, except you.
.

Im not saying theres anything wrong with it, but the whole makeup of thas market is different, as are the tools etc. The book is more of an interesting read than a trading education.

That book is great for entertaining but it will not make you profitable, neither the quotes from it. I see them simply as another useless rant on psychology and discipline which comes and goes from the Editor.
Anyone who thinks that he must read them once in a while probably is losing and needs recomforting words. Otherwise, if his approach works, why does he need this kind of motivational stuff?
I believe that there's only one truth in the market, that which a trader discovers himself.

"One may form an opinion regarding a certain stock and believe that it is going to have a pronounced move, cither up or down, and eventually be correct in his opinion but will lose money by presuming or acting on his opinion too soon.
Believing it to be right, he acts immediately, only to find that after he has made his commitment, the stock goes the other way."

This quote just says everything that I made wrong on my recent lose. My position was right but my play was wrong. lol

I knew cable was going down but my impatience made me lose and miss the beginning of the move. I was so sure I was right that jumped on it short on last friday from 1.5277 with SL 1.5307 while I could rest on the holiday and sell it on monday at better price. I was stopped out, the market reached 1.5318 and is still falling lol.

The markets are always the same, but we are not.

It doesn't make sense to criticize yourself.
You didn't know cable will go down. You supposed it based on some analysis. The market could have gone long another 200 pips before going short.
If you trust your analysis then you know that sometimes you win and sometimes you lose and the whole point is to make more on average when you win.
Therefore I don't see where the quote from Livermore fits in. Of course you'll miss the perfect entry most of the time, so what?

Well to wind it up.

It's different strokes for different people. For some it works and for some it won't, maybe something else will.

No worries

Back to charts.
.

And for those who want a free online copy of
Reminiscences of a Stock Operator,
try this site, which is also chock full of .pdfs.

I dont think you knew, you only guessed then when your guessed turned out right you thought "I must have known". Its a book about a trader who had a knack for reading the tape, he blew up many times and his skills are not applicable to todays markets.

From Livermore himself on the first page of Chapter 1: