JESSE LIVERMORE’S STOCK TRADING ACUMEN

Jesse Livermore is one of the greatest stock market operators to have ever lived. The man had made huge money in the market as well as gone bankrupt many times. There is an abundance of wisdom in his trading style which can be helpful to both, an experienced or a novice trader/investor.    

Trend spotter

He was a trend follower who took position in the direction of the trend and added new position whenever his ‘system told him to do so.’ And, all he wanted to know was that ‘there is an irresistible force behind those major movements.’ Utilizing those methods he successfully shorted both the market crash of 1907 and the Great Depression crash for some of the biggest trading wins in history.

How the plan fell into place

Livermore realized that ‘studying general conditions is much better than looking after individual stocks.’ This perspective helped him to size up the entire market, and its trend. So when everybody was picking around stocks and losing money playing at – the ‘stock picking’ game.’ He understood the simple fundamental truth that - ‘you want to be long in a bull market and short in a bear market.’ In other words, he knew that ‘no one can catch all the individual stocks fluctuations.’ For example, all he wanted to do was ‘buy and hold all the shares in a bull market, till the bull market is near its end, and then become bearish.’

Livermore’s trading system

Livermore believed that if he had patience to wait for the market to arrive at his ‘pivotal point’ he always made money. Because after that point he just had to sit tight and let the market run its course, knowing if he did so, the action of the market itself would give him in due time the signal to take profits. According to him ‘the large part of the market movement occurs in the last forty eight hours of a play.’ He explains his pivotal point with an example, take a stock which has been in a downward trend for quite some time and reaches a low point of 40. Then it has a quick rally in a few days to 45, then it backs and fills for a week in a range of a few points, and then it starts to extend its rally until it reaches 49.5. The market becomes dull and inactive for a few days. Then one day it becomes active again and goes down 3 or 4 points, and keep on going down until it reaches a price near its ‘pivotal point’ of 40.  Here the market should be watched carefully, because if the stock resumes its downward trend, it should sell below its pivotal point of 40 by 3 or more points before it has another rally of importance. If it fails to pierce 40 it is an indication to buy as soon as it rallies 3 points from the low price made on that reaction. If the 40 point has been pierced but not by the proper extent of 3 points, then it should be bought as soon as it advances to 43. If either of the two above scenarios happens, then in majority of cases, it will make the beginning of a new trend, and if the trend is going to be confirmed in a positive manner, it will continue to advance and reach a price over the pivotal point of 49.5 by 3 points or more. He was of the opinion that these kind of well defined trends do not occur very often, and used the words ‘upward trend’ or ‘downward trend’ instead of customary words like ‘bullish’ or ‘bearish’ because these words ‘fully express what is going on at that specific time.’

Truths he abided by

Fundamental truths of speculation that Livermore laid for himself are as follows: never average down, trade for profits not for action, understand the general condition of the market, learn to read the tape, ride winners for all their worth, keep cash in reserve and take profit in cash.

The enemy is ‘us’

He knew sticking to these points: watch the tape, establish resistance and be ready to trade along the line of least resistance as soon as it has been determined’ was easier said than done. As Livermore understood human’s follies and knew sticking to the plan required patience and resisting the urge to over-trade. He believed that professional speculation is often ‘a tedious and boring affair’ in which months can pass without the right ‘general conditions’ are found. He called the people who over-trade ‘fools,’ according to him – ‘there is the fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool who thinks he must trade all the time.’     

Words to heed

How best to behave in the market, is best told by Jesse Livermore when he narrated the following incident – An old broker once said to me ‘if I am walking along a railroad track and I see a train coming towards me at sixty miles per hour, do I keep on walking on the ties? Friend, I sidestep. And I do not even pat myself on the back for being so wise and prudent.’ What Livermore meant by this was – ‘to be a great trader you have to be a great loser.’

His wisdom stood the test of time

It is a shame that Jesse Livermore was unable to follow his own money management rules because if he had, maybe his life would not have ended so tragically, he shot himself dead. Nevertheless, the validity of his strategy is that ‘it still works’ nearly a hundred years after he originally formulated and proved it with repeated success.