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Jesse Livermore's Trading Approach

Jesse Livermore is one of the best traders ever seen in history. He started trading at the age of 14 and continued trading until 1934, and died at the age of 63 in 1940.

His trading strategy remains relevant, and most modern investors benefit from his strategies to be profitable in the markets.

Livermore has adopted the swing trading style. His net worth was $100 million as of 1929, which equates to around $1.5 billion today. We're going to talk about the main principles that made him a fortune.

Who is Jesse Livermore?

Jesse Livermore traded with his own money and never traded with other peoples' money. He created his own trading system without depending on any existing trading system. He used his own trading patterns, indicators following a speculative trading approach.

His Principles

Mr. Livermore made his investment decisions by using a very strict money management plan. Obviously, there were no computers to track the stock market in the early 1900s. Therefore he used ledgers to track prices.

He focused on stocks moving with a trend avoided the ones in a ranging market. Also, when stock prices reach a pivotal point, he carefully observed what reaction the stock price would give.

Here's an example of what we have just said:

Let's say a stock made an $80 low, moved up to $100, and then dropped back to $80 again. Jesse Livermore would wait until the stock's pivotal point to see how it plays before making a trading decision.

If the same stock went down further to $75, a trader like Mr. Livermore would trade on the short side, but if it jumps to $80, it would trade on the long side at $82 or $85, while monitoring the $60 level, which is equally a “pivotal point.”

If the same stock rises above $100, it would lead to an addition to the position (pyramiding), let's say, $105. At this time, failure to hold above $100 may cause the liquidation of the long positions. Failure to hold up to $100 may result in the liquidation of long positions at this time.

Note: This is just an example and the figures are not exact, including the buffer.

Mainly, Jesse Livermore traded breakouts from ranging markets using a similar strategy as explained above.

He trades on highs and lows, using a buffer to checkmate false breakouts. Livermore utilized price patterns and combined them with volume analysis to determine if a trade would stay open.

“There is only one side of the market and it is not the bull side or the bear side, but the right side,” Jesse Livermore.

These are what Mr. Livermore believes to determine if the trading in the right positions.

  • Higher volume on the breakout.
  • After a breakout, prices should move in the breakout direction for the first few days.
  • There’s usually a normal reaction when prices retrace against the trend, but volume is lower than it was in the trending direction.
  • At the end of the normal reaction, the volume moves up in the direction of the trend.

As Jesse Livermore studies these principles, any deviation serves as a warning signal.

Another important thing about Livermore’s trading style is his attention to “time.” Jesse Livermore believes “Timing the market” is crucial and shouldn’t be ignored.

Why The Timing Is Important?

Taking a trade too early or too late is just as wrong. It is always best to allow prices to confirm themselves before taking any position. Mr. Livermore believed it doesn't matter how a trader thinks about the market.

The trader should wait until his/her thesis is confirmed and the right opportunity is presented by the market.

Note: Pivot points are supported by most charting software, and quite popularly used by traders today. It applies to all sorts of markets including stocks, precious metals, cryptocurrency markets.

Some Powerful Trading Rules/Tips From Jesse Livermore

“There is nothing new in Wall Street. There can't be, because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again,” Jesse Livermore.

All markets have the same phases and they are cyclical. They rise, peak, dip and then bottom out again. When one market cycle is over, the next one will begin.

1. Your Opinions May Be Wrong

Livermore’s maxim,

“Markets are never wrong but opinions often are.”

The market may move contrary to what you predicted, as a speculator. If such situations were to occur, a trader like Jesse would have ditched his speculations and flowed with the market.

However, a trader needs to understand that investors should never argue with the market, even if their personal research appears to be 100% positive.

The moment the market shows you something contrary to what you expected, it could be a good time to exit. Regardless, you can always try your thesis over and again, sometime in the future, when the time is right.

2. You Can’t Beat Wall Street All The Time

Mr. Livermore’s maxim,

“You can win on a stock, but you cannot beat Wall Street all the time.”

This mentality would help any trader/investor/speculator succeed in the markets. Apparently, no one can beat Wall Street all the time if you were able to do that once, don' think it'd always be so.

“Do not trade every day of every year.”

To back up this truism, Jesse advises newer traders not to trade every day. Yes, the urge to trade daily may come, but it's left for the trader to discipline himself/herself.

A trader needs a lot of time to plan and make decisions as per how to invest in a particular market. Trading every day means you're not following a strategy, which could result in substantial losses.

3. Go For Profitable Trades

Jesse Livermore’s saying,

“Continue with trades that show you a profit, end trades that show a loss.”

It is possible to end up with multiple active trades at a go, but, in such situations, it is advisable to stick with the winning trades.

“Successful trading is always an emotional battle for the speculator, not an intelligent battle,” Livermore.

Most traders can't get over their lost trades. They hold onto losing positions with the hope that the market will turn around. Instead, they should rather ride their winners while cutting off the losing trades immediately.

Other Trading Quotes and Tips From Jesse Livermore

  • Go all-in on rising stocks and sell falling ones
  • Only trade when the market is clearly bullish or bearish
  • When it's rising, take long positions. In contrast, take short positions when it's falling.
  • Work with pivot points.
  • Exit the market when the trend you are profiting from is done.
  • Always trade the leading stock in any market – it has to be the one with the strongest trend.
  • Exit before a margin call
  • Trade with trends, short in a bear market, and buy in a bull market
  • Don't average down a losing position.
  • Be specific, don't follow too many stocks.

There are many lessons that newer investors can learn from Jesse Livermore. While Mr. Livermore is probably the most successful trader of all time, he's lost everything in the end.

However, Jesse has always admitted his mistakes; his losses (not all) are usually due to the following reasons:

  • Inability to fully formulate the rules for trading in a market.
  • The rules were formulated, but not followed.

These reasons can also affect modern traders in any market. Firstly, a trader must craft a flexible trading system and stick to that at all times.

Jesse Livermore's trading strategy is very simple yet powerful. Both new and advanced traders can include it in their trading toolbox. The strategy mainly recommends waiting for key turning points and taking trades accordingly.

Also, even when the point comes into play, Jesse advises that you trade with a buffer and move towards the direction of the overall market.

Allow prices to dictate your actions and keep up with the winning trades (for as long as it keeps yielding profits). Furthermore, you should know when to exit a market and when to stay back.

Ditch the urge to trade when there are no good reasons or clear opportunities. Furthermore, when there are “clear” trading opportunities, go for stocks that move the most.

Jesse Livermore's strategy worked very well for him and turned him into a millionaire trader. However, on certain occasions, Jesse failed to follow his system because he wasn't afraid to “swing a big line,” and that made him go bankrupt a couple of times.

The most important takeaway from this article is,

“If You Don't Have a Trade Setup, Don't Trade.”

An investor should create and follow a trading plan.

Howbeit, it takes a lot of time, effort, and hard work to create a trading plan, but in the end, you'd be glad you did. Again, when the market looks to be moving contrary to what you have in your plan, ditch the market, and don't trade, any opportunity would come.

Summary

Jesse Livermore's investment strategy is quite different from George  Soros' investment strategy, even though the two legendary investors are both speculators – they bet on market prices. However, Livermore considered long-term investments at some time.

As a new trader, you may not be as buoyant as Livermore to trade with your personal funds as your capital; however, regardless of how you got the capital to trade, following Jesse’s guidelines will make you more of profits than loss.

Also, you can study the strategy of George Soros or that of John Bogle. Also, if you wish to be a value investor, the strategy of Benjamin Graham would go a long way.

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