Have you heard the name Jesse Livermore before? If you’re a day trader, then you have him to thank. He was born in the 1800s and even survived the stock market crash in the 1920’s. He was born in Massachusetts but had a turbulent life that ended tragically. However, his knowledge of trading lives on helping traders learn.
Legendary trader Jesse Livermore, arguably the best stock trader to have lived within the last century. Few stock trading books have had the influence and lasting popularity as this trading classic: Reminiscences of a Stock Operator.
Written almost 100 years ago, this book is just as relevant now as it was then. This blog will provide insight into Livermore’s life, stock trading beliefs, and how those beliefs translate to the modern-day trader.
Jesse Livermore led a life of brilliance and excess. Surrounded by the glitz and glamour of Wall Street, mistresses, scandals, money, and bankruptcy included, Livermore was a legend. He lived big and made his millions during the crash of 1929.
But by 1934, Livermore would have depleted the $100 million fortune he earned on the stock market just five years earlier. He declared a third bankruptcy, went through his second divorce, and committed suicide in 1940. All of this aside, his trading lessons live on and are just as relevant today as they were years ago.
Jesse Livermore lived in the era of telegrams, ticker machines, and manually updated quote boards. Fast forward a century, we have smartphones, instant information at your fingertips and high-frequency trading and just about any set of data you want to see to make an educated investment decision.
Therefore, you’ll not be alone in thinking his book should be obsolete. But Livermore himself points out people do not change. The same forces of fear and greed are still evident today. People will try all sorts of trickery to get your money, some resorting to desperate measures. The message is that the emotions of people towards money remain the same as they did ages ago. And not surprisingly, those same emotions move the markets today.
Livermore provides us with numerous lessons. First and foremost, he pointed out that stocks decline much faster than they climb. I absolutely would have to agree with that; the fall from grace is swift. And you should, therefore, never average down losses.
He suggests taking out half of your profits once you have doubled your original capital. But perhaps more importantly, give yourself time, be patient and don’t over-trade; it will lead you to the poor house.
Jesse Livermore was always fascinated by the markets and spent much of his time in the bucket shops of New England trying to understand them. He soon developed the skill of being able to read the tape. Helping him to remember the patterns for each stock, he would write his theories into a notebook.
Soon after, he realized he could predict the movement of a stock based on its previous price pattern. At the age of just 14, it was not long after that he placed his first trade and became a full-time trader.
Livermore had a quantitative approach to price action which would be familiar to most modern-day traders, like those in the Bullish Bears futures room. Price action is king in our Futures room.
Initially, he was a purely technical trader. His system gave predictions to the short-term stock price movement. However, his style of trading refined over the years as he continuously studied the markets. At the age of 21, Livermore amassed the equivalent of $686,000 and was banned from the bucket shops. This leads him to the proper brokerage accounts in New York, where he knew his price action system could beat the markets.
However, he was soon to realize that his plan was not profitable outside of the bucket shops. The transaction costs and delays of brokerages meant he couldn’t buy or sell quickly enough like before. He continued trading in New York but before the end of the year, compounded by excessive use of leverage, his trading account slowly declined. He was eventually wiped out and declared broke.
Livermore later said the game taught me the game, and it didn’t spare me the rod while teaching. Despite his losses, Livermore knew his scalping strategy worked in the bucket shops due to the favorable transaction costs and quicker trade execution speeds. He later traveled to St. Louis under a false name. And began to rebuild his accounts. Afterward, once again making a considerable amount of money in the bucket shops, he decided to test his luck again in New York, where he knew real wealth was possible.
During his second bout in the Big Apple, Jesse laid several wrong bets, which once again almost wiped him out. He refers to those losses as tuition fees and says nothing is like losing all you have in the world for teaching you what not to do. And when you know what not to do not to lose money, you begin to learn what to do to win—wise words from a wise man.
From 1916 and through most of 1917, the Dow Jones lost approximately 40% of its value. At the start of the year, Livermore was bullish like everyone else but gradually moved to the bearish side. He noticed previous leading stocks had stopped rising, a key indicator that the market was at a turning point. And finally, the bear market began, and he doubled down on short positions. During this time, he took $3 million in profit.
He makes the point that the bear market conditions can start long before prices start to fall. In this case, it is wiser for the trader to wait for prices to begin to fall before entering a large short position. Buyers should not be long or short unless the market action confirms otherwise. You must be dynamic enough to switch your opinion in the direction of the market activity.
Lesson Number One: Cut your losses quickly. Before you even enter a trade, you need to know at what point you will exit. Waiting to exit a position when it’s going against you is not a winning strategy.
Lesson Number Two: Confirm your judgment before trading a larger than average position. In other words, start small and gradually scale into your winning position and buy in the direction of your winning trade. Never add to a losing position; don’t average down your losses.
Lesson Number Three: Watch leading stocks for the best action. Livermore knew that the trending stocks make money. Watch them and watch for bank moves.
Lesson Number Four: Don’t prematurely exit out of your winning positions. Let profits ride until price action dictates otherwise. Remember, patience equals profits.
Lesson Number Five: Buy all-time new highs. Don’t discount the merits of buying all-time or 52-week highs. One of the best ways to make money in the stock market is to buy the break out of all-time highs from long-term consolidation of a price range.
Lesson Number Six: Use pivot points to determine trends.
Lesson Number Seven: Control your emotions. We talk about this often in the Bullish Bears trade rooms.
“It was never the thinking that made big money for me; it was my sitting.”
Livermore made his reputation as a short seller during the panic of 1907. Before the panic hit the roads of Wall Street, he had been selling short following his views of the market and general economy. He watched as the situation gradually got worse, and he stayed short.
At the bottom of the market, Livermore finally took his profits and made his first million-dollar gain. According to a nifty inflation calendar, I found online $1,000,000 in 1900 is equivalent in purchasing power to about $31,140,714.29 today, an increase of $30,140,714.29 over 121 years. The dollar had an average inflation rate of 2.88% per year between 1900 and today, producing a cumulative price increase of 3,014.07%.
But perhaps more importantly, he realized he finally learned to trade intelligently and patiently. Can you say that for yourself?
Another key lesson learned by Jesse Livermore is that there is as much to learn from victory as from defeat. The learning process isn’t restricted to lessons about making money but also to avoid the loss of money. And he alludes to keeping losses small and allowing your winners to run, a common principle preached by modern-day traders.
No matter how robust the strategy may seem, money is often lost through no fault of the speculator from developments nobody can foresee—referring to them as inconveniently timed storms. Having a backup plan for unforeseen events is paramount to limit your market exposure and aid your psychology.
One of Livermore’s favorite tactics was to buy at the point of least resistance. His rationale? No matter how high the prices, the market can always go higher. Equally, no matter how cheap the price may seem, it can still go lower.
Reversal Pivot Points: According to Livermore, reversal pivotal points are “the perfect psychological time to mark the beginning of a new move, representing a major change or reversal in a primary trend.”
But, how do you confirm its a true market reversal? Luckily, Jesse gave us come cues:
The rally I mentioned above is what Livermore referred to as a reversal pivotal point, because it marks the return of large money back into the market.
This is the time to focus on trend re-entry. Likewise, a reversal pivotal point marks a trend reversal whereas a continuation pivotal point confirms that the trend continues.
Once we see a breakout of the previous bear market trendline, typically we see consolidation or accumulation in the market. All of this is in preparation or lift in price.
It is at this breakout of the consolidation phase or pivot point where you should enter.
Most importantly, just like we see in a reversal pivotal point, a true breakout is only confirmed with volume.
Buy at breakout off a consolidation is one the greatest secrets in trading stocks. It can help maximize your profits and minimize your risk at the same time.
The symptoms of weakness, tells you when to exit the market.
Symptom 1: Failed Rallies—–After an overall head is formed, the subsequent rallies often end with a weak momentum, Failed to make a new high and volume decreased.
Symptom 2: High End Price Consolidation (Distribution)—–The volume during this period of time is very high. After distribution, the price would breakdown and downtrend formed.
Notice how the buy and sell actions are at whole number junctions. And at these junctions, there are periods of consolidation before a breakout. Additionally, he makes note that only stocks of interest showing high volume should be considered. And in fact, Livermore says that this is the primary characteristic.
“The ONLY stocks of interest to the speculator are the ACTIVE stocks, those stocks to which volume is an evident, obvious, primary characteristic.” For the traders out there reading this, they will know this theory has stood the test of time and is the foundation used today by some of the world’s best traders – including Mark Manervy, perhaps the most successful stock trader of the modern era.
Over his entire legendary career, Jesse Livermore obtained two important insights into trading: firstly, he often lost when he entered a position before a pivotal point was formed and secondly, the big money could only be made by capturing big trends.
Thus he developed the discipline to avoid any personal opinion until a pivotal point appeared, as well as to hold onto his positions until the market was shown the symptoms of weakness.
Jesse Livermore’s legend lives on today through the work of many others. And he is undoubtedly the most influential trader of our time. We can learn a lot from him and that’s why we follow his wisdom at Bullish Bears.