Born in 1877, Jesse Livermore is possibly the most famous trader in history.
He started trading at the age of 14 from bucket shops. His tape reading skill was so good that these bucket shops eventually didn’t want to do business with him.
At his peak in 1929, he was worth $100 million. Ultimately, he lost his entire fortune when he broke his trading rules.
The same trading rules which made him millions, caused him to lose everything, when he lost control of himself.
Still, there are valuable lessons to be learnt from Jesse Livermore’s trading experience.
Jesse Livermore’s 25 Trading Lessons
1. Watch the market leaders, the stocks that have led the charge upward in a bull market.
That is where the action is and where the money is to be made. As the leaders go, so goes the entire market.
If you cannot make money in the leaders, you are not going to make money in the stock market. Watching the leaders keeps your universe of stocks limited, focused, and more easily controlled.
2. There is nothing new on Wall Street or in stock speculation.
What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure.
All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance, and hope. This is why the numerical formations and patterns recur on a constant basis.
I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans — and human nature never changes.
3. The market will often go contrary to what speculators have predicted.
At these times, successful speculators must abandon their predictions and follow the action of the market. Prudent speculators never argue with the tape.
Markets are never wrong, but opinions often are. Remember, the market is designed to fool most of the people most of the time.
4. They say you never go broke taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.
I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but also the intelligence and patience to sit tight.
After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.
5. First, do not be invested in the market all the time.
There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move.
Second, it is the change in the major trend that hurts most speculators.
Always remember; you can win a horse race, but you can’t beat the races. You can win on a stock, but you cannot beat Wall Street all the time. Nobody can.
There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily– or sufficient knowledge to make his play an intelligent play.
Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.
6. It is what people actually did in the stock market that counted – not what they said they were going to do.
7. Successful trading is always an emotional battle for the speculator, not an intelligent battle.
8. I believe that the public wants to be led, to be instructed, to be told what to do.
They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company.
They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of contrary opinion.
9. I believe that having the discipline to follow your rules is essential.
Without specific, clear, and tested rules, speculators do not have any real chance of success. Why?
Because speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan.
Speculators without a single clear plan can only act and react, act and react, to the slings and arrows of stock market misfortune, until they are defeated.
10. If you can’t sleep at night because of your stock market position, then you have gone too far.
If this is the case, then sell your position down to the sleeping level.
11. Remember that stocks are never too high for you to begin buying or too low to begin selling.
12. When I am long of stocks it is because my reading of conditions has made me bullish.
But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions – or my prepossessions either – to do any thinking for me. That is why I repeat that I never argue with the tape.
13. Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.
14. I trade on my own information and follow my own methods.
15. If after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should anyone ask for explanations? There are probably very good reasons why it should go down.
16. When I’m bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stocks on a scale down, I buy on a scale up.
17. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urging of a magnetic personality when plausibly expressed by a brilliant mind.
18. A man must know himself thoroughly if he is going to make a good job out of trading in the speculative markets.
19. When the market goes against you, you hope that every day will be the last day – and you lose more than you should had you not listened to hope. And when the market goes your way, you become fearful that the next day will take away your profit and you get out – too soon. The successful trader has to fight these two deep-seated instincts.
20. 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 person of inferior emotional balance, or the get rich-quick adventurer. They will die poor.
21. Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.
22. It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.
23. Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.
24. When you make a trade, “you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade.
25. Don’t worry about catching tops or bottoms, that’s fools play. Keep the number of stocks you own to a controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities.
Take your losses quickly and don’t brood about them. Try to learn from them but mistakes are as inevitable as death. And only make a big move, a real big plunge, when a majority of factors are in your favor….every once in a while you must go to cash, take a break, take a vacation.
Don’t try to play the market all the time. It can’t be done, too tough on the emotions.