One of the most famous trading books ever written, the book itself is remarkable both as a source of trading wisdom and as a story. It was recorded and fictionalized by Lefevre after just a few interviews which is also an amazing feat since you really get the sense that this is a first-hand account of a trader’s life, not just a made-up work of fiction.
The main character, Larry Livingston, is actually based on the true story of Jesse Lauriston Livermore, one of the greatest, if not the greatest, traders of the 20th century. Though the book doesn’t include Livermore’s final days, which I think are also an important part of the many lessons we can learn from Livermore.
- Livermore (L from now on) started working as quotation-board boy in a stock-broker office
- Good at mental math
- Not much of a talker
- The numbers were always changing. But why they changed, he didn’t know or care.
- This is how he became interested in price behaviour
- “I could remember in detail how the prices had acted on the previous day, just before they went up or down.”
- “That was all I had to think about five hours every day and two on Saturdays: that they were always changing.”
This reminds me of the 10,000 hours rule and the adage often quoted by price action traders that after thousands of hours looking at charts they can simply know what to expect. Is there any truth to it? Can we activate a special part of our brain after simply studying charts long enough without any formal study/structure?
- “There was no end of parallel cases and these made precedents to guide me. I was only fourteen, but after I had taken hundreds of observations in my mind I found myself testing their accuracy, comparing the behaviour of stocks to-day with other days. It was not long before I was anticipating movements in prices.
- “I carried the "dope sheets" in my mind. I looked for stock prices to run on form. I had "clocked" them. You know what I mean.”
Nope, not really. More detail would be great, but we won’t get it.
- “You can spot, for instance, where the buying is only a trifle better than the selling. A battle goes on in the stock market and the tape is your telescope. You can depend upon it seven out of ten cases.”
- There is nothing new in Wall St. Whatever happens today has happened before and will happen again.
- L began to record his observations. Not a paper trading/ demo account of wins/losses but “hits and misses” and whether he was accurate or not.
- He would look for a stock “that was behaving as it always did before it broke eight or ten points” then check it later with the tape.
- “The message from the tape”
- The reason why a stock does what it does may not be known for a while, weeks or months
- But you must act instantly or be left out
- Example of Hollow Tube that went down 3 points while the rest of the market rallied
- “On the following Monday you saw that the directors passed the dividend. That was the reason. They knew what they were going to do, and even if they didn't sell the stock themselves they at least didn't buy it. There was no inside buying; no reason why it should not break.”
- Instead of going home after work L would study the changes, looking for ‘repetitions and parallelisms of behaviour - learning to read the tape”
- L begins to trade his system during his lunch hours
- L “was playing a system and not a favorite stock or backing opinions. All I knew was the arithmetic of it. As a matter of fact, mine was the ideal way to operate in a bucket shop, where all that a trader does is to bet on fluctuations as they are printed by the ticker on the tape.”
- By fifteen he had made his first thousand and showed his mom. She urged him to put it in savings.
- “That’s all the fun there is. Being right by using your head.”
- It didn’t take more courage to trade more shares. It just meant he was “right more emphatically.”
- Risking $10 when that’s all he had is braver than risking $1M if he has another $1M salted away
- Eventually the bucket shops got wise to L’s success and would stop taking his margin.
- They called him ‘The Boy Plunger’ where ‘plunger’ was slang for a high-roller, a big better
- As a result he had to change brokers and shops all the time
- He’d occasionally lose on purpose if they were suspicious and then “sting them proper”
- He’d use fictitious names but eventually they all shut down on him
- The various ways that Livingston tries to avoid getting identified by bucket shops, and the ways that he uses to connive new trades is a continuous theme in the book.
- Eventually the only bucket shop that will do business with him is the biggest and richest - the Cosmopolitan Stock Brokerage Co.
- After a few months, they didn’t refuse his business for fear of the bad reputation they’d earn but “they made me put up a three-point margin and compelled me to pay a premium at first of a half point, then a point, and finally, a point and a half.” An impossible handicap Like a Forex broker decreasing your leverage until it’s barely possible to make anything without risking huge amounts. Sound familiar, SimpleFX?
- Not satisfied with this, they still eventually try to double-cross him.
- L was the “only man they were afraid of”. Despite the penalties under which he traded he was still the heaviest trader, sometimes trading 5000 shares.
- “Of course, the bucket shops never ask for more margin. The thinner the shoestring the better for them, for their profit lies in your being wiped.”
- “In the old days whenever a bucket shop found itself loaded with too many bulls on a certain stock it was a common practice to get some broker to wash down the price of that particular stock far enough to wipe out all the customers that were long of it. This seldom cost the bucket shop more than a couple of points on a few hundred shares, and they made thousands of dollars.
- This is called “the bucket shop drive”
L tells the story of another big operator who would send agents to all the buckets shops to place orders and then he would distribute bull tips among his cronies and then he would bid up the price, helped by the room traders. He ended up dying, “poor and obscure.”
Footnotes & commentary