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Amazing Black Magic Trading Method

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  • #1
  • First Post: Edited Sep 23, 2012 2:04pm May 26, 2012 1:47pm | Edited Sep 23, 2012 2:04pm
This thread tries to show application of basic principles of Jesse Livermore's trading method.

He was a legendary trader, lived (and ended) a life, made and lost millions when they were worth today's billions.

But one thing he never got was how to take the things.

He waited weeks before taking a position because he wanted perfect conditions according to his method of play. This helped him in trading but he never learned that in life, one never needs to wait for an opportunity, every situation no matter how good or bad, is an opportunity....................................................................... It all depends how you take it.
The Thief of Wall Street
  • #2
  • Edited 8:48pm May 26, 2012 8:37pm | Edited 8:48pm
I spend great deal of time studying Jesse Livermore's method trying to figure out how he quickly turned small amounts into big rolls of money. What was his skill that made him so fearful that every broker on Wall Street was reluctant in taking business from him.

I found three things in his method:

1. Money Management
2. Speculating big moves
3. The timing of his trades

Without going into the detail how I put all pieces of his method together, will go and explain this method.

Money Management:
Jesse was known as Boy Plunger because he took very heavy positions. Many times he lost and went bankrupt. However, he finally created a method that limited his risk while reward remained aggressive.

to be continued...............
The Thief of Wall Street
  • #3
  • Edited May 27, 2012 1:12am May 26, 2012 10:24pm | Edited May 27, 2012 1:12am
Quoting Chicky
I spend great deal of time studying Jesse Livermore's method trying to figure out how he quickly turned small amounts into big rolls of money. What was his skill that made him so fearful that every broker on Wall Street was reluctant in taking business from him.

I found three things in his method:

1. Money Management
2. Speculating big moves
3. The timing of his trades

Without going into the detail how I put all pieces of his method together, will go and explain this method.

Money Management:
Jesse was known as Boy Plunger because...
I don't know how much % of his account he put at risk on one trade, but I do know that it was quite significant portion of his account. However, he did not do it blindly. He made his moves based on the following tactics:

1. Waited for several weeks until he received confirmation of a trend reversal. He many times mentioned that since he had to be right had to wait longer than others. He also mentioned time and again that nothing pays off if one is not right from the very begining. The next section "Speculating big moves" will discuss what signs he used to confirm a trend reversal. He kept a colorful log of price behavior to keep track of the normal and extraordinary corrections. Think I have a copy of this log somewhere in my computer and will post that while explaining this in the next section.

2. He started with a very very small testing trade. This testing trade used to be so small that I don't think he had any purpose behind this testing trade other than to study price behavior.

3. Once he decided a direction, entered either immediately before or after a breakout. Remember that Jesse started as a brilliant scalper and switched to longer term trading only because small brokers (Bucket Shops) refused to take any business from him. He therefore moved to NY to trade with bigger brokers but the issue he faced here was that he could not scalp because of the time leg between when a trade took place on the trading floor and when it made its way to the trading board. While scalping he waited for the break of a support/resistance before putting his bet and opened heavy positions with a very small stoploss. He referred to those tight stoplosses as Shoe String Margin. However, after switching to longer term trading, he either placed his bets before or just after the break but only if he was sure that overwhelming fundamentals and market situation supported that likely break. One more change he made was to split his entries into three or more parts. He would open 1/3rd of a position when break occured, 1/3rd when pa came back to re-test the broken support/resistance and the last 1/3rd when pa made little more progress in his direction. At this point, in addition to his first three entries, would shoot an order times bigger than these three entries combined. That is why he was called The Boy Plunger. He would then set a stoploss near his first entry and would wait until this new trend exhausted and start giving signs of reversal. This way he used to ride a whole trend and achieved a very good r/r. As he says it was not his thinking but sitting that made profit for him. However, please do remember that he was a stock and commodity trader and not a currency trader. As far as I know, currencies do make trends but not like stocks and commodities. That means if one wants to apply Jesse's method in currency trading, the trading cycles would be shorter than that of Jesse's.

4. You would ask where money management comes here? The answer is that since he was a long term trader and traded based on Underlying Fundamentals, he was right 8 or 9 times out of 10. With this kind of success ratio, he could not suffer more than 2 losses in a row. Since his r/r was very high, only one winner used to multiply his accounts many times. However, he used to immediately close his positions if he did not understand market behavior. This way his losses were small and profits were huge.

to be continued...............
The Thief of Wall Street
  • #4
  • May 26, 2012 11:59pm May 26, 2012 11:59pm
Dont think this is Black Magic, it sounds very sensible, i have been thinking about this method for a while now.

like you say wait and watch even if it takes weeks, only go on what you have been watching when its ready, then strike, put in small stop losses and get out of a trade as soon as you see a possible reversal. I like Mr Livermores style.

Stick to Commodities
  • #5
  • May 27, 2012 6:19am May 27, 2012 6:19am
Quoting Chicky
I don't know how much % of his account he put at risk on one trade, but I do know that it was quite significant portion of his account. However, he did not do it blindly. He made his moves based on the following tactics:

1. Waited for several weeks until he received confirmation of a trend reversal. He many times mentioned that since he had to be right had to wait longer than others. He also mentioned time and again that nothing pays off if one is not right from the very begining. The next section "Speculating big moves" will discuss what signs...
sounds like an interesting thread. Hope it continues like that.
  • #6
  • May 28, 2012 6:06am May 28, 2012 6:06am
Quoting Custos
sounds like an interesting thread. Hope it continues like that.
Yes u are rite WHAT an amazing thred..Be patient what and wait.. MM I find that hard.........
  • #7
  • Edited 11:31am May 28, 2012 11:07am | Edited 11:31am
Quoting Chicky
I don't know how much % of his account he put at risk on one trade, but I do know that it was quite significant portion of his account. However, he did not do it blindly. He made his moves based on the following tactics:

1. Waited for several weeks until he received confirmation of a trend reversal. He many times mentioned that since he had to be right had to wait longer than others. He also mentioned time and again that nothing pays off if one is not right from the very begining. The next section "Speculating big moves" will discuss what signs...
2. Speculating Big Moves

Jesse, as a scalper, never traded big swings. He entered as soon as a break occured and covered quickly. It doesn't mean he did not wait to accumulate decent amount of pips. In his scalping days, he took positions with a definite Takeprofit target. He used very short stoplosses. He used the term Water Logged stock for ranging stocks. If a stock started forming a range, he would get out and would wait for the signs of another breakout. He learned price behavior as a teenager while working for a broker. He noticed two things about price behavior. 1) They were always moving, and 2) If price broke a certain level, it traveled too far 7 out of 10 times. He used to take note of these price levels and entered his positions on breakouts with an estimated takeprofit target in points he thought the stock would break. Although he was very successul in scalping, later turned to a swing trader and changed his method accordingly. I don't know what he means by "Winning on Balance" but he won on balance during normal times. He says that market provides three to four opportunities in a year for a longer term trade i.e. a major swing and therefore one has to wait for these opportunities.

To be continued............
The Thief of Wall Street
  • #8
  • Edited 11:20pm May 28, 2012 10:23pm | Edited 11:20pm
Quoting Chicky
2. Speculating Big Moves

Jesse, as a scalper, never traded big swings. He entered as soon as a break occured and covered quickly. It doesn't mean he did not wait to accumulate decent amount of pips. In his scalping days, he took positions with a definite Takeprofit target. He used very short stoplosses. He used the term Water Logged stock for ranging stocks. If a stock started forming a range, he would get out and would wait for the signs of another breakout. He learned price behavior as a teenager while working for a broker. He noticed...
Like mentioned earlier, Jesse turned small sums of money into millions, and that was about a 100 years ago. Millions at that time meant something. He started with as little as $5,000 or $25,000 and made millions out of that. He could do this by being able to identify a trend change and riding the whole trend from start to finish. When that trend reversed, he rode back on that new trend multiplying his earnings. He was so good at trend identification that he was generally right 9 out of 10 times.

I searched through his writings and books about his method to know how he was able to identify trend change with such a precision. I found out that it is no rocket science. It is so simple that anyone can do it. However, in order to benefit from this, one has to switch to longer term trading.

I spent several months only to find out how longer term trading can be more profitable than short-term trading. Had to do a lot of research and demos to conclude that longer term trading is in fact more profitable than short-term trading, much much more profitable and involves very little risk. You may like to see my posts starting a thread and questions posted in other threads inviting traders to contribute how long term trading can be more profitable than short-term intra day trading.

Jesse, identified signs of trend reversals keeping a columnar worksheet. That worksheet had a left and a righ side. On right side he kept daily record of all up moves in a stock and on left side he recorded all down moves in that stock. He noted highs and lows of that stock. He then classified highs and lows as normal corrections and abnormal corrections. For example if a stock bounced from a support or resistance (correction) he noted the level to which that correction occured and marked it either as normal or abnormal correction. He has not given any fib level or % upto which a correction he considered normal, but from the data he provided it is between 30% to 40%. Any correction or bounce above this was considered abnormal correction. However, I believe he also kept an eye on corrections that were significantly smaller than a normal correction. I believe this because he also expressed his thinking about variation between 1st and subsequent corrections. He mentioned that the 1st correction after a break is generally smaller than subsequent corrections. That makes sense if one is looking at a HISTORICAL move. The first correction may be big enough for the size of the move just after the break, but small when compared to the whole move when it concludes.

To be continued...................
The Thief of Wall Street
  • #9
  • Edited 11:31pm May 28, 2012 11:14pm | Edited 11:31pm
Quoting Chicky
Like mentioned earlier, Jesse turned small sums of money into millions, and that was about a 100 years ago. Millions at that time meant something. He started with as little as $5,000 or $25,000 and made millions out of that. He could do this by being able to identify a trend change and riding the whole trend from start to finish. When that trend reversed, he rode back on that new trend multiplying his earnings. He was so good at trend identification that he was generally right 9 out of 10 times.

I searched through his writings and books about...
Will later attach his worksheet and the notes how to use that worksheet (Have to dig from my files). I tried to use that worksheet on EUR/USD but did not finish it because it is nothing but a way of keeping track of higher highs, higher lows, lower lows and lower highs. He got the trend change indication just like we do by observing HH,LL,LH and LL. We consider a lower high and lower-low a sign of possible trend change from bullish to bearish, so did he.

But this was not his only or main tactic of identifying the trend reversal. Since he knew a trend change means a profit of several hundred points (or several thousand pips), he waited until the new bull trend started making HHs and HLs (or a bearish trend LLs and LHs). He tried to enter as soon as possible, normally AFTER a new bull trend completed second HL, but not always. Sometimes he was so sure of the trend change that he entered without waiting for the price to make a second HL for new bull trend and a second LH for a bear trend.

That was his technical method of obtaining signs of a trend reversal. He was an excellent chartist or Tape Reader as he refers to this art. Tape reading later became a secondary tool for him in identifying a trend change. The first one was Underlying Market Conditions as he calls them or Fundamentals.

This is very important to note that he referred only OVERWHELMING fundamentals as Underlying Market Conditions and not day to day news or data releases. He waited to the point where all these news and data provided a conclusive evidence of a long-term trend change. For example, we have been hearing about EURO problems for last many months, without going into the specifics, we know that euro is facing a lot of issues and it will remain under pressure for some more time. Now if we wait until things improve for Euro, everything goes against USD and in Euro's favor and if our tape reading confirms that, we enter a position. This will be Jesse Livermore's way.

Jesse, also mentioned that it was never too late for stock to go down or up from where it was today. In other words, this market is topless and bottomless, only a change in underlying market conditions decide where it would stop and start reversing.

Following Jesse Livermore's method, it is not too difficult to identify a long-term trend, early on get a trend reversal warning, be right most of the time and get a good r/r.

If it's so easy why not many people over these 100 or so years have adopted his method?

It requires believing in yourself and your method. How many have balls strong enough to short euro now? how many can wait until underlying market conditions reverse? how many looked for gold as a safe haven when this whole financial crisis started in 2008 and held it until today? It requires a longer term vision.

As Jesse Livermore says there are many early bulls and bears but they do not hold their positons until the trend exhausts.

To be continued..............
The Thief of Wall Street
  • #10
  • May 28, 2012 11:36pm May 28, 2012 11:36pm
Quoting Chicky
Will later attach his worksheet and the notes how to use that worksheet (Have to dig from my files). I tried to use that worksheet on EUR/USD but did not finish it because it is nothing but a way of keeping track of higher highs, higher lows, lower lows and lower highs. He got the trend change indication just like we do by observing HH,LL,LH and LL. We consider a lower high and lower-low a sign of possible trend change from bullish to bearish, so did he.

But this was not his only or main tactic of identifying the trend reversal. Since he knew...
Good and interesting posts. I assume to minimize losses and maximize wins he pyramided into positions on each breakout? I would be interested how he trailed his stops behind the positions to leave enough space for market volatility.

Well, and I guess one of the few people that actually has traded similarly is george soros.
  • #11
  • May 28, 2012 11:46pm May 28, 2012 11:46pm
Quoting Custos
Good and interesting posts. I assume to minimize losses and maximize wins he pyramided into positions on each breakout? I would be interested how he trailed his stops behind the positions to leave enough space for market volatility.

Well, and I guess one of the few people that actually has traded similarly is george soros.
Custos,

No. He did not pyramided his positions. He specifically mentioned that he does not pyramid.

I have covered how he used to enter in the Money Management part. Let me explain it once again. He would average out his first postion, just to get better price. Once pa started going in his favor and he was sure that he was right, would shoot as many positions as possible with tight stoploss. Then a long wait until trend exhausted.

Think of a person who has tp of 600 pips and a stoploss of 20 pips and is right 9 out of 10 times. He was that mother fucker.
The Thief of Wall Street
  • #12
  • May 28, 2012 11:57pm May 28, 2012 11:57pm
Quoting Chicky
Custos,

No. He did not pyramided his positions. He specifically mentioned that he does not pyramid.

I have covered how he used to enter in the Money Management part. Let me explain it once again. He would average out his first postion, just to get better price. Once pa started going in his favor and he was sure that he was right, would shoot as many positions as possible with tight stoploss. Then a long wait until trend exhausted.

Think of a person who has tp of 600 pips and a stoploss of 20 pips and is right 9 out of 10 times. He was that...
Oh sorry, must have missed that bit. Thanks for explaining it again to me. Question is how he was able to get such a high win-rate with such a small stop loss. Didn't the market shake him out (even if it was going down over all assuming a bear market)? Or is the win-loss ratio referred to as the win-loss of his (then established) overall position in this trend?

Thanks again for that thread!
  • #13
  • May 29, 2012 12:15am May 29, 2012 12:15am
Quoting Custos
Oh sorry, must have missed that bit. Thanks for explaining it again to me. Question is how he was able to get such a high win-rate with such a small stop loss. Didn't the market shake him out (even if it was going down over all assuming a bear market)? Or is the win-loss ratio referred to as the win-loss of his (then established) overall position in this trend?

Thanks again for that thread!
His trade size in number of pips was big, very big therefore his stoplosses were far away from daily market noises. Please do remember that he went bankrupt many times in his career.

The 600/20 pip was just an example.

If one is looking at 2,000 to 2,500 pip movement, a 20% stoploss would be 400 pips. This is quite far away from ordinary market noise and yet for 1:5 r/r. Like I mentioned, longer term trading provides better r/r. However, I don't know how tight were his stoplosses and how much % of account he risked on one move. He hasn't mentioned it. On many occassions he mentioned that he used to keep a one point margin and doubled his money in a jiffy. He kept a wide stoploss for first few smaller trades.

If you carefully observe the "trend reversal breakouts", the next entry after a failed one always give you a better r/r for the same price level target. Therefore, losses on taking chance of a breakout automatically get recovered in one successful breakout provided price goes to the level you initially speculated.

Ps. Like in context of current Eur/USD if a reversal breakout does not occur at 1.2500 level, it will occur somewhere below 1.2500, maybe 1.2400 or 1.2000 or 1.1800 or 0.8000
The Thief of Wall Street
  • #14
  • May 29, 2012 12:18am May 29, 2012 12:18am
Quoting Chicky
His trade size in number of pips was big, very big therefore his stoplosses were far away from daily market noises. Please do remember that he went bankrupt many times in his career.

The 600/20 pip was just an example.

If one is looking at 2,000 to 2,500 pip movement, a 20% stoploss would be 400 pips. This is quite far away from ordinary market noise and yet for 1:5 r/r. Like I mentioned, longer term trading provides better r/r. However, I don't know how tight were his stoplosses and how much % of account he risked on one move. He hasn't mentioned...
thanks for the swift response. Makes sense.
  • #15
  • Edited 12:40am May 29, 2012 12:30am | Edited 12:40am
Quoting Chicky
Will later attach his worksheet and the notes how to use that worksheet (Have to dig from my files).
Sorry guys and gals, could not find that worksheet and the notes. Its not there in my computer. I printed it out from a site and then tore them off after studying.

I tell you where to look for it. It is given in his book titled "How to Trade Stocks" or somthing similar to this.

You search and I search. Let's see who finds it first.


ps. They are asking to register for a free PDF download. Now I remember why I didn't download it earlier. I online read the book and printed out the worksheet. ....................LOL. I remember, each page was rotated left on that site and I had to read the book keeping my loptop sideways. Good luck. I am not going to do it again.
The Thief of Wall Street
  • #16
  • May 29, 2012 11:16pm May 29, 2012 11:16pm
Quoting Chicky
Will later attach his worksheet and the notes how to use that worksheet (Have to dig from my files). I tried to use that worksheet on EUR/USD but did not finish it because it is nothing but a way of keeping track of higher highs, higher lows, lower lows and lower highs. He got the trend change indication just like we do by observing HH,LL,LH and LL. We consider a lower high and lower-low a sign of possible trend change from bullish to bearish, so did he.

But this was not his only or main tactic of identifying the trend reversal. Since he knew...
There is one more important point connected to how he speculated the trend, but I keep on forgetting that. Anyway, lets move to the next topic.

3. Timing of his trades

People who have read Reminiscences of a Stock Operator may recall the event when he entered a position too early and went bankrupt despite he was right about the market. He gave an example of like spotting a wagon full of money but he ran too fast towards it and fell halfway down, later somebody else came and took away that wagon. Sometimes market takes time in doing the right thing. One has to wait until market starts justifying the fundamentals and goes in the direction it should. If it still doesn't go in the right direction, there is something not known. Stay away from such market behavior.

He mentioned many a times to leave first few and last few pips because these are the pips that costed most to even experienced traders. In other words enter when market confirms the direction and cover your positions on getting signs of reversal.

Now ask me, what one should do if market makes a good break but then reaches a nearby support/resistance? We don't know if price would be able to cross this hurdle. Should we consider this hurdle a sign of reversal and cover our position with a few pip profit? Taking profits at this stage would defy Jesse's tactic of Sitting Tight, but if don't close our position here it will again defy Jesse's principle of leave last few for others. What should we do?

I know the answer, but would like to invite your opinions. Kindly remember that no answer is stupid, but many questions are. Please feel free to comment.

To be continued..............
The Thief of Wall Street
  • #17
  • May 29, 2012 11:48pm May 29, 2012 11:48pm
Quoting Chicky
He mentioned many a times to leave first few and last few pips because these are the pips that costed most to even experienced traders. In other words enter when market confirms the direction and cover your positions on getting signs of reversal.

Now ask me, what one should do if market makes a good break but then reaches a nearby support/resistance? We don't know if price would be able to cross this hurdle. Should we consider this hurdle a sign of reversal and cover our position with a few pip profit? Taking profits at this stage would defy Jesse's...
I don't know the answer and unfortunately I am reading this thread in a big hurry. I promise I will read again later more carefully because it is very interesting.

This is my take on the answer. No, a bounce from the resistance it is not reason enough to get out. Maybe the stop should be tightened there but that's it. Now, if the price tries again to take out that resistance and fails then get out of there and wait for another opportunity.
  • #18
  • May 29, 2012 11:50pm May 29, 2012 11:50pm
Chicky Hi

Interesting thoughts on Jesse Livermore.

I spent quite a while reading up on him.

He was certainly a good trader who took significant risks, making a hundred million bucks and then losing it (100m was a lot in the 1930s)! I'm not really sure that he came to grips with money management as his main regret was that he didn't keep some of his profits - he blew his brains out the final time he went bankrupt.

As for his book...how to trade stocks "The Market Key"and the spreadsheets really just identify pivot points, as if you would visually on a chart today within seconds. (Livermore did not understand why traders used charts).

This book has been discredited by another author as a cheap way of making cash before his death...and Livermore dressed it up to sound more sophisticated than it was.

Livermore was also able to make his profits because the markets worked differently back then....Livermore was able to capture certain markets such as wheat, bid up the price and then get out. He would also take small positions to determine what the price effect would be - if positive he would add to his position before going all in.

In all, a great trader (with flaws) - If I could be a 10th as good as him, I would be happy.

Cheers
  • #19
  • May 30, 2012 12:10am May 30, 2012 12:10am
since he was trading big trends with fundamentals backing them, a small technical formation should not have been of any consideration to him.
So, sitting tight should apply until fundies change. And then once fundies are changing, it's time to get out and leave the rest of the pips on the table.

Quoting Chicky
There is one more important point connected to how he speculated the trend, but I keep on forgetting that. Anyway, lets move to the next topic.

3. Timing of his trades

People who have read Reminiscences of a Stock Operator may recall the event when he entered a position too early and went bankrupt despite he was right about the market. He gave an example of like spotting a wagon full of money but he ran too fast towards it and fell halfway down, later somebody else came and took away that wagon. Sometimes market takes time in doing the right...
  • #20
  • May 30, 2012 1:06am May 30, 2012 1:06am
Quoting Custos
since he was trading big trends with fundamentals backing them, a small technical formation should not have been of any consideration to him.
So, sitting tight should apply until fundies change. And then once fundies are changing, it's time to get out and leave the rest of the pips on the table.
Answer Part 1 is exactly correct. That's it.

Now what about Part 2?................. Hint: His Money Management tactic
The Thief of Wall Street
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