Probe System

  • Factor #1: Do not take your entire position all at once.
    • It is wrong and dangerous to establish your full stock position at only one price.
  • Factor #2: Wait for confirmation of your judgment — pay more for each lot you buy.
    • The basic logic is simple and concise: each trade, as it is established toward the total 1000 share position, must always show the speculator a profit on his prior trades. The fact that each trade showed a profit is living proof, hard evidence, that your basic judgment is correct in the trade. The stock is going in the right direction — and that is all the proof you need, and conversely if you lose money… you know immediately that your judgment is wrong.
  • Factor #3: Establish in your mind the total amount of shares you want to purchase, or specify the amount of dollars you are willing to commit, before you begin the trade.
    • … you must first decide how many shares you want to trade. For example, if you want to purchase 1000 shares as the full final position do it like this: Start with a 200 share purchase on the pivot point — if the price goes up then buy an additional 200 shares, still within the pivot point range. If it keeps rising, buy another 200 shares. Then see how it reacts, if it keeps on rising or corrects and then rises you can go ahead and purchase the final 400 shares.
    • [my note: using number of shares is better here because as the price rises, you spend more at each purchase meaning you put a bigger bet as you get more confirmation that your bet is correct. Whereas value investing should use the amount of dollars method because as the price drops, you buy more shares with the amount of dollars meaning you are increasing your bet size as the stock becomes more of a bargain. The key difference here is that the Livermore way buys on the way up, and value investing buys on the way down.]
  • Pyramiding
    • … I have tried to establish my main position at the beginning, at the initial Pivotal Point, and then increase it at what I call the Continuation Pivotal Point — providing the stock comes out of the consolidation with strength. By this I mean the trader must wait until the stock has proven it is going to break out on the strong side of the Continuation Pivotal Point…
    • The final time a trader can pyramid is when a stock breaks out to a clear new high on heavy volume this is a very good sign because it most likely means that there is no more overhanging stock to stop the progress of the stock for a while.
    • Pyramiding is a dangerous activity… for the further a stock gets extended in its rise or decline the more dangerous the situation becomes. I tried to restrict any serious pyramiding to the beginning of the move. I found it not wise to enter a pyramiding action if the stock was far from the base — better to wait for the Continuation Pivotal Point of the breakout from a new high.