One of the greatest traders of all times, Jesse Livermore’s exploits reveal the genius behind the man who made fortunes on the bourses.

Jesse Livermore is the greatest trader of all times. Considered as the God of traders, Livermore did not keep the secret of making money to himself. He shared his thoughts, trading strategies and secrets of making money in the markets in two books, which are still treated as Bible by the trader community.

• His strategies, thoughts on structure of markets, psychology of speculators, traders, brokers, insiders, companies and investors are relevant for traders and investors even today.

• Livermore made his first trade at the age of 15.

• His trading career saw several ups and downs.

• And his experience has resulted in a list of do’s and don’ts, which is for those who wants to learn from them.

Enumerated in this article are some of his key strategies, thoughts and learning's for traders and investors.

1. Preparing for Battle

The most important thing for a person to do in trading is to believe in himself and his judgment. Livermore said this principle is important if one wants to make a living in this game. This is why he advised not to fall prey to tips. It is said that one’s own judgment and guesswork helps a person to develop his brain power.

Therefore, the best way is to guess right...

One should be a serious observer of prices, be able to think, relate, calculate and remember the behaviour of prices because everything is in the price. A successful trader like Livermore enjoyed the process of making money more than the money itself as well as advocated building strong processes, discipline and a good mindset.

2. FIRST BE RIGHT

Livermore said...

“It is not the bull side or the bear side; in the markets, what matters is the right side.”

A right trade at the right time. And to be right, he advocated trading in leading stocks and strong industry groups because that is where he believed the biggest winners are identified and big money is made.

The basic objective is that they are the most participated stocks and liquid, too. It is much more reliable and easy to read the behaviour of such stocks.

They are true companions of the trader because such stocks exhibit the real picture of what a typical trader is seeking or expecting.

 

3. WHEN TO TRADE?

The first two trading rules that he developed in his early trading pertained to the timing of entering a trade that is when to enter a trade and when not to enter the trade.

• As per Livermore’s observations, one should enter a trade only when there are enough triggers or favorable conditions.

It is believed that when all odds are in your favour, the chances of being right increases. While trading, entering a trade and exiting a trade is most crucial.

• He in fact developed a check list that used to help him before entering any trade.

• He always wanted to trade with the trend and not against it so that chances of a right trade were higher.

 

4. SIT TIGHT

• If your trade is right and the trend is in your favour, then the most important thing to do in trading according to Livermore is to sit tight on the trade.

• He believed that big money is only made when you are not only right but also when you sit tight on the trade.

• He believed that holding on to a trade was the single most important factor that set him apart from the crowd.

 

5. WHEN TO SELL

He believed that one should not try to time the trade and sell at the top.

He said...

“I never buy at the bottom and I always sell too soon.”

Before selling one should look for a reaction. Prices may come down and then again make a new high. The best thing is that if prices fall from the top and they resist a bounce back, then you need to get into action and this is the time when one needs to sell.

 

6. THERE IS ALWAYS A TRADE

He believed that irrespective of the direction of the market, there is always a trade to be made. Taking cues from market direction - downward or upward - he used to initiate trades, which were either long trades or short trades.

• AVOID FREQUENT TRADES AND TOO MANY STOCKS:

  This means one should not trade in the markets all the time. This is because there will be times in the markets when conditions are not favorable.

Further, trading in too many stocks too often would lead to nowhere. He believed that money cannot consistently be made every day and every week. One should make few smart trades and earn some profits out of them. Instead of frequent trades, one should hold cash in one’s portfolio.

 

7. KEEP CASH IN RESERVE

Livermore felt that cash is king. A trader without cash is equivalent to a blockbuster hero with no movies. Livermore stressed that traders must fight the urge to constantly trade. Instead of keeping the cash busy, one can wait for the right opportunity.

Jesse Livermore felt that a trader should always keep a portion of his/her account in cash so that one is armed to take what the market offers you. He said patience is the key to success, not speed.

 

8. TIMING A TRADE

He raised the most important aspect of trading when he said that buying on a rising market is the most comfortable way to buy stocks. In trading, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. 

 Livermore advised not to try buying cheap but to buy effectively. Similarly in case one wants to short a stock it is foolish to look for a peak. He emphasized on using the trend effectively and accordingly building the position .

“I came to learn that even when one is properly bearish at the very beginning of a bear market, it is well not to begin selling in bulk until there is no danger of the engine backfiring,”

--Jesse Livermore

 

9. TOO HIGH TOO LOW

This is also the reason Livermore believed that stocks are never too high to begin buying or too low to begin selling. However, this does not mean buying or selling or initiating a trade at one go.

After the initial transaction, one should not indulge in second transaction until the first trade shows a profit. This is the most important rule of trading because it will ensure that losses are kept to a minimum level.

 

10. MANAGING A TRADE

Livermore believed that as long as one is right and a stock is functioning in the desired direction, then it is wise for the person to hold on to the stock.

Never be in a hurry to book profits early until the said stock shows a sign of reversal. Likewise, he also strictly advised and followed stop losses.

He said if a particular position goes wrong, one should get out immediately with a small loss rather than averaging on the losing trade.

• What appears to be a good trade in the beginning could actually turn out to be a bad trade by the end of it.
• Markets do not function according to the position that one has taken, it is we who have to function how the markets behave.
• As long as a company stock is behaving right and the market is supporting, one should ride on the winning trade and get out of a losing trade early.

Jesse Livermore said, “Profits always take care of themselves but losses never do.”

Instead, he emphasized on adding more to the winning position. So if one is long in a particular stock and that stock shows some profit in initial trade, and if the trend continues, he should add more stocks to the winning position.

Real money is only made in positions which are showing profits from the beginning. This entitles a minimum scope for risk as well as a maximum scope for booking profits.

 

11. SPECULATION AND INVESTMENT

Many people make the mistake of holding on to a losing trade. Taking a losing position home and worrying about it day and night in the hope of recouping the losses is the most foolish thing and surely lead to the demise of a person’s trading career.

• The biggest mistake traders make is that they start accumulating a lot of losing trades or stocks in a portfolio as investments.
• However, this trading style according to Jesse Livermore is a major mistake. Whether it is a losing position or a winning position, a trade should be treated as trade and not as investment.
• In fact a similar thing could also happen in a winning trade when we start attributing fundamentals of companies to profits.

 

12. TRADE REVERSAL

Jesse Livermore closely watched his trade. If a profitable trade reversed along with the rest of the market, then he would quickly consolidate his position in the stock. A trade in uptrend or downtrend could have several natural reactions in between during its journey.

But when these natural reactions do not seem to be natural, Livermore thinks it is time to rethink and get out of the trade.In case of reversal if a profitable trade starts becoming a losing trade, it is a time to get out of the trade. Here, there is one more thing to note.

Too much confidence leads to nowhere because it overlaps the rationality of the trade. Similarly, a good trader never regrets. For him his strategy, plan and set of rules are more important than proving It’s simplified...his gut feeling to the market. Those who fight with the market actually fight with themselves.

 

13. STRATEGIES FOR A NARROW MARKET

What should a trader do when the markets lack clear direction - upward or downward? This is possible when the markets lack enough reason in either direction.

Livermore believed that when prices are not moving anywhere there is no point in guessing a bull side or a bear side of the market.

He suggested that in such situations the best thing to do is to wait for the right opportunity when prices break the rage or when prices start to break the resistance in either direction of the stock markets.

 

14. CLUES LIE IN PRICES

• Tape reading was an important part of his trading game.
• He believed everything is in price. Prices tell you everything from when to sell to when to buy.
• Good news or bad news - everything is in the price.
• If an investor carefully studies the behaviour of prices, he/she will find that markets typically start reacting much before the news.
• Stocks start reacting much before companies announce any developments.

He had predicted the stock market crash of 1929, one of the greatest crashes in stock market history, well before it actually took place by just observing the price behaviour of markets and leading stocks.

An investor must study general conditions of the market to seize them so as to be able to anticipate probabilities.

He said...

“I learned that I had to work for my money. I was no longer betting blindly or concerned with mastering the technique of the game, but with earning my successes by hard study and clear thinking. I also had found out that nobody was immune to the danger of making sucker plays. And for a sucker play, a man gets a sucker pay.”

Markets and its participants are full of tricks and comprise those who make mistakes, who do not learn from their mistakes, who average on their losing trades and who refuse to be wrong and are probably suckers in the market. This is because they are the ones who create a lot of money for smart traders.

 

15. SIGNS OF WARNING

On a broader level, Livermore would keep an eye on the undertone of the selected leading stocks and industries to gauge the behaviour of price. He said that a market can and does often cease to be a bull market long before prices generally begin to break.

His warning signs will give a market participant early indication if he notices those stocks which had been leaders of the market and reacted several points from the top and are refusing to come back.

If leading stocks cease to advance in rising markets, then it is time to take stock of the situation or possible reversal. Similarly, in a falling market if leading stocks resist to fall, then there is reason to look for a reversal in the ongoing trend.

 

16. SOMETHING IS WRONG

In trading, it is too late to wait for the news flash before selling a stock or buying a stock. Prices largely know the news before they actually happen and they start to behave in line.

The difficulty here is to fight with your own conviction, confidence and ego. Most traders refuse to be wrong till they are proved wrong. However, wise traders do not argue; they are prepared to change before they are proved wrong.

 

17. LEARNING FROM MISTAKES

There is no end to learning even after reading and learning so much about Livermore’s trading secrets. Traders make a lot of mistakes and many of them are the same mistakes. Sticking to rules of the game is very important especially in the learning period because in this period mistakes could cause a lot of damage and lead to disappointments too.

It is very important to maintain the right temperament.

• Despite knowing many traders do what they are not supposed to do and when they make mistakes, they not only lose money but also faith in themselves and question their ability as traders.
• Throughout his life, Livermore made several mistakes, which cost him millions.
• He in fact went broke on several occasions.
• Even while he was in the losing side of the game, he believed in gaining the experience and learning to not repeat the same mistakes again.

He also said that if a man didn’t make mistakes he would own the world in a month.

But if he didn’t profit from his mistakes, he wouldn’t own a blessed thing. Whatever happens in the stock market today has happened before and will happen again.

 

18. LEARN TO CONTROL YOUR EMOTIONS

• Even if somebody knows the rules of the game, yet the biggest and the most important thing that makes a trader and a trade successful are how one deals with emotions.

• A losing trade attracts fear, while a gaining trade attracts hopes. So there are many such basic emotions that could prove to be the biggest hindrance.

A person’s ability to control greed and fear, while balancing on hope and despair and other such basic instincts of human nature are important in trading. One should stick to his or her original plan.

Livermore believed that instead of hoping, an investor must fear; instead of fearing, he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a bigger profit.

It is absolutely wrong to gamble in stocks the way the average man does. However, circumstances change and conditions change and there is no surety that the price will behave the way you desire.

A trader should be ready to make changes, cut his trade instead of allowing his emotions to take over the trade.

 

 

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