Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.

In Michael Covel’s book Trend Following, there is a section devoted to major events that have occurred, which have significantly affected the markets, and that it was pointed out how often a trend follower was trading in the correct direction at that particular time. By definition, a trend follower would be trading in the correct direction when there is a major market specific event (such as the 1987 market crash, the dot.com bubble, the 2008 crash etc), but also more often than not when other major events occur, such as the collapse of Barings Bank, 9/11 etc.

Back to Livermore. While he started shorting stocks on a hunch prior to the earthquake, I follow the trend on the indices as a basis for whether I should be long or short stocks. Indeed, Livermore himself came to the same conclusions:

“I began to see more clearly – perhaps I should say more maturely – that since the entire list moves in accordance with the main current… Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”

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