Livermore left traders a set of rules for trading stocks that emphasizes increasing the size of your position as it goes in the right direction and cutting losses quickly when wrong.
He sometimes did not follow his own rules strictly. (See below for his rules) He claimed that his lack of adherence to his own rules was the main reason for his losses after making his 1907 and 1929 fortunes.
Livermore first became famous after the Panic of 1907 when he sold the market short as it crashed. He noticed market conditions where there was a lack of market liquidity existed (There was no Fed back then propping up the market).
He predicted that there would be a sharp drop in the stock market when all the speculators were simultaneously forced to sell because of margin calls and a lack of credit.
Without the necessary liquidity, there would be no buyers in sight to absorb the stocks being sold, further driving down prices. After the crash and its aftermath, he was worth $3 million.
He proceeded to lose 90% of that 1907 fortune on a cotton trade that went bad. He violated many of his key rules; he listened to another person’s advice (he preferred working alone) and added to a losing position.
When the bull market of the 20’s started he turned it around and started rebuilding his fortune.
Livermore continued to make money in the bull market of the 1920s. However, in 1929, he noticed the same market conditions like that of the 1907 market. He started shorting various stocks and adding to his positions as they kept declining. While just about everyone lost money in the Wall Street crash of 1929, Livermore increased his net worth to over $100 million after his short-selling profits.
Here are his trading rules written in 1940. You will find that almost all of them still apply today. Which proves that very little changes in the market over time because it is based on human nature which never changes.
Jesse Livermore’s Trading Rules
- Nothing new ever occurs in the business of speculating or investing in securities and commodities.
- Money cannot consistently be made trading every day or every week during the year.
- Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
- Markets are never wrong – opinions often are.
- The real money made in speculating has been in commitments showing in 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 profits.
- One should never permit speculative trades to turn into investments.
- The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride up and ride them all they back down again.
- Never buy a stock just because it has had a big decline from its previous high.
- Never sell a stock because it seems high-priced.
- I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction. (This is a simple retracement strategy)
- Never average down on losing trades.
- The human side of every person is the greatest enemy of the average investor or speculator.
- Wishful thinking must be banished.
- Big movements take time to develop so you need to develop patience.
- It is not good to be too curious about all the reasons behind price movements. Just accept it and take advantage of it.
- It is much easier to watch a few stocks than many.
- If you cannot make money out of the leading stocks, you are not going to make money out of the stock market as a whole.
- The leaders of today may not be the leaders of two years from now.
- Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
- Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.
Make it easy on your self and follow a professional swing trader who knows the rules of trading and can help guide you becoming a profitable trader.
Here are the two I use:
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– Robert Walsh