Market Wizard Corner: Jesse Livermore ~ How To Trade Stocks
Natalia
How To Trade Stocks
By: Jesse Livermore
Introduction:
Wall Street never changes, the pocket change, the stock change, but Wall Street never changes because human nature never changes ~ Jesse Livermore.
Jesse Livermore was a legend on Wall Street, he started with his first trade of $3.12 and he was a millionaire before he was thirty. He worked hard for his good fortune. As a boy of fourteen, he kept a notebook with thousands of trades penciled in. He found patterns and trends, and practiced theories of his own and others.
Jesse once said to his son, Paul Livermore, “Perhaps by reading my mistakes and shortcomings you will be able to avoid the pitfalls that wait and befall every active trader and speculator. Learn through my mistakes and my victories in the market and you will prosper.”
Jesse Livermore has a New Year’s ritual of locking himself into Chase Manhattan Bank vault from Friday 5:30PM before the bank close until Monday morning at 8AM. During his confinement time, he reviewed all the trades that he made throughout the year, refer to his good kept notes of why he bought, went short, or close the position.
When it was time to leave on Monday, Livermore would take handful of cash from the vault. With all the paper transaction throughout the year, he belief that he needed to touch the money and feel the power of cash to make home re-appraise his stocks and commodities positions and determine if these were the position he would keep if he had the choice ~ were there better opportunities.
Chapter 1: Challenge of Speculation
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 man of inferior emotional balance, or for the get rich quick adventurer. They will die poor.
Again, Jesse Livermore talked about the importance of record keeping. The fruits of your success will be in direct ratio to honesty and sincerity of your own effort in keeping your records, doing your own thinking and reaching your own conclusion.
You cannot wisely read a book on “How to Keep Fit” and leave the physical exercise to another. Nor can you delegate to another the task of keeping record.
In time these various ideas began to crystalize and Jesse Livermore was able to develop a concrete method of keeping records in such a form that he could use them as a guide. His theory and practical application have proved that nothing new ever occurs in the business of speculating or investing in securities or commodities.
There are times when one should speculate, and just as surely there are times when one should not speculate. There are times when money can be made investing and speculating in stocks, but money cannot consistently be made trading everyday or every week during the year, Only the foolhardy will try it. It just is not in the card and cannot be done.
To invest or speculate successfully one must form an opinion as to what the next move of importance will be in a given stock. Speculation is nothing more than anticipating coming events. However don’t back your judgement until the action of the market itself conform your opinion.
DO NOT anticipate and move without market confirmation ~ being a little late in your trade is your insurance that you are right or wrong.
After forming an opinion with respect to a certain stock ~ do not be too anxious to get into it. Wait and watch the action of that stocks for confirmation to buy. In this case, Livermore give an example similar to O’Neil bases, and Livermore suggested to wait for the pivot point breakout before entering the trade. Otherwise you may be too early, get bored, get out of the position and miss the move.
Markets never wrong ~ opinion often are.
Experience has proved to Livermore that the real money made in speculating has been in commitment in a stock or commodity showing a profit right from the start. As long as a stock is acting right, and the market is right, do not be in a hurry to take profit. You know you are right, because if you were not, you would have no profit at all. Let it ride and ride along with it. It may grow into a very large profit, and as long as the action of the market does not give you any cause to worry have the courage of your conviction and stay with in.
Profit always take care of themselves but losses never do.
To be consistently successful, an investors or speculator must have rules to guid him/her. Livermore believe that anyone who will take the time and trouble to study price movement should in time be able to develop a guide, which will aid him/her in future operation or investment. A great many traders keep charts or records of averages.
You MUST keep your own records. You MUST put down your own figures. DOn;t let anyone else do it for you. You will be surprised how many new ideas you will formulate in so doing; ideas which no one else could give you, because they are your discovery, your secret, and you should keep them your secret.
DO NOT try to pick tops and bottom, one should never sell a stock because it seems high-price. Conversely, never buy a stock because it has had a big decline from its previous high.
Jesse Livermore recorded that he became a buyer as soon as a stock makes new high on its movement after having a normal reaction (read: pullback)
Livermore follow the trend at the time, and he advises to do same thing too.
NEVER averages loss, it is foolhardy to make second trade if your first trade shows you a loss.
Natalia
Chapter 2: When Does A Stock Act Right
Stocks, like individuals, have character and personality. Some are high-strung, nervous, and jumpy; others are forthright, direct, logical. One comes to know and respect individual securities. Their action is predictable under varying sets of conditions.
At the beginning of the move you will notice a very large volume of sales with gradually advancing prices for a few days. Then what I term a “Normal Reaction" (I believe that Jesse Livermore refer to low volume pullback as normal reaction)
will occur. On that reaction the sales volume will be much less than on the previous days of its advance. Now that little reaction is only normal. Never be afraid of the normal movement. But be very fearful of abnormal movements.
At the first part of a movement of this kind the distance above the previous high point to the next high point is not very great. But as time goes on you will notice that it is making much faster headway on the upside. The stock is becoming harder to buy.
I have learned from the pros that the best stocks will not let you in, and the worst stocks will not let you out.
You have had patience to stay with the stock all during its natural progress. Now have the courage and good sense to honor the danger signal and step aside.
Danger signal should not be ignored.
The human side of every person is the greatest enemy of the average investor or speculator.
Speculation as a serious business, wishful thinking must be banished; that one cannot be successful by speculating every day or every week, that there are only a few times a year, possibly four or five, when you should allow yourself to make any commitment at all. In the interims you are letting the market shape itself for the next big movement.
The speculator who insists on trying to profit from daily minor movements will never be in a position to take advantage of the next important change market wise when it occurs. Such weaknesses can be corrected by keeping and studying records of stock price movements and how they occur, and by taking the time element carefully into account. Real movements do not end the day they start. It takes time to complete the end of a genuine movement.
Chapter 3: Follow the Leaders
We know that prices move up and down. They always have and they always will. My theory is that behind these major movements is an irresistible force. That is all one needs to know. It is not well to be too curious about all the reasons behind price movements.
You risk the danger of clouding your mind with non-essentials. Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide. Do not argue with the condition, and most of all, do
not try to combat it.
Remember too that it is dangerous to start spreading out all over the market. It is much easier to watch a few than many.
Confine your studies of movements to the prominent stocks of the day. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
Just as styles in women's gowns and hats and costume jewelry are forever changing with time, the old leaders of the stock market are dropped and new ones rise up to take their places.
If you analyze correctly the course of two stocks in the four prominent groups,
you need not worry about what the rest are going to do. Keep mentally flexible. Remember the leaders of today may not be the leaders two years from now.
All this paragraph above can be summarized in what Bill O’Neil says to buy the leading stocks in the leading industry groups when market is in uptrend.