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The Four Principles of Trading

  1. The price has the final say. You may have an opinion on the market, but it is dangerous to marry it to your positions, as famous trader Richard Dennis explained, “You don’t get any profits from fundamental analysis; you get profit from buying and selling. So why stick with the appearance when you can go right to the reality of price and analyze it better?”

  2. Follow instead of forecast. Legendary trader Paul Tudor Jones once declared that he would never hire fundamental traders who frequently tried to outwit the market and got burned, because by the time the fundamentals become clear, the trend is over. You can never know if the next trade wins or not, so simply follow your rules and see.

  3. Preserve your capital. Since the market is impossible to forecast, all great traders agree that you must limit your losses before it gets out of hand, since they have seen a lot of intelligent traders got bruised in a market crash simply because they held on to the losers or even averaged down on the way as the price became “fundamentally” attractive.

  4. Let your winners ride. The other side of the coin is not to cut the profit too soon before it can grow large. Jesse Livermore explained, “I’ve known many men who… began buying or selling stocks when prices were at the very level which should show the greatest profit. And … they made no real money out of it.” Why? They sold too soon.

How to Trade in Stocks by Jesse Livermore

howtotrade
I will just write what  the market is going to do tomorow, for that just have some patience  for time being till then  few quotes from Jesse Livermore’s book How to Trade in Stocks (one of my favorites, originally written in 1940). Pay particular attention to the first quote!

  • “Successful traders always follow the line of least resistance – follow the trend – the trend is your friend”
  • “Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes”
  • “Just because a stock is selling at a high price does not mean it won’t go higher” (more…)

Trading Quotes

The tape tells the truth, but often there is a lie buried in the human interpretation
Jesse Livermore
 Charts not only tell what was, they tell what is; and a trend from was to is (projected linearly into the will be) contains better percentages than clumsy guessing
R. A. Levy
The biggest risk in trading is missing major opportunities, most of enormous gains on my accounts came from 5% of trades.
Richard Dennis
 Your human nature prepares you to give up your independence under stress. when you put on a trade, you feel the desire to imitate others and overlook objective trading signals. This is why you need to develop and follow trading systems and money management rules. They represent your rational individual decisions, made before you enter a trade and become a crowd member.
A. Elder

Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever

In the early part of the 20th century, Jesse Livermore was the most successful (and most feared) stock trader on Wall Street. He called the stock market crash of 1907 and once made $3 million in a single day. In 1929, Livermore went short several stocks and made $100 million. He was blamed for the stock market crash that year, and solidified his nickname, “The Boy Plunger.” Livermore was also a successful commodities trader.

 

I think the most valuable knowledge one can gain regarding trading and markets comes from studying market history, and studying the methods of successful traders of the past. Jesse Livermore and Richard Wyckoff are two of the most famous and successful traders of the first half of the 20th century. Many of the most successful traders of today have patterned their trading styles after those of the great traders of the past.

Here are some valuable nuggets I have gleaned from the book, “How to Trade Stocks,” by Jesse Livermore, with added material from Richard Smitten. It’s published by Traders Press and is available at Amazon.com. Most of the nuggets below are direct quotes from Livermore, himself.

• “All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical (technical) formations and patterns recur on a constant basis.”

• “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.”

• 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.

• Livermore’s money made in speculation came from “commitments in a stock or commodity showing a profit right from the start.” Don’t hang on to a losing position for very long.

• “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.”

• “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.”

• “When a margin call reaches you, close your account. Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep that good money for another day.” (more…)

4 Types of Traders

The first type of profitable discretionary trader is the one who has a natural feel for the market.  When you talk to one of these traders and ask them about their trading at some point you’ll hear them say something about ‘feeling the market was this way or that….’. These are traders who over the years have acquired a lot of implicit knowledge of the market and its participants. They understand what moves markets and they also have the required self-trust to act on their ideas and to protect themselves when they are wrong.  Their personalities allow them to have the self-trust to know their limits and believe in their capabilities. We could call them a ‘natural born trader’; and there are very few of them. Although Jesse Livermore eventually blew-out, he’s an example of this rare type of natural trader.

 The second type of profitable trader – or more accurately temporarily profitable – is the lucky trader; the trader who’s P&L is currently in an up swing but they’ll soon be negative. Often these traders either got lucky with a number of trades and can not replicate it, or they learned the habit of holding onto losing trades and they got lucky when those positions came back. This accounts for the largest number of “profitable traders” – but for these traders the money often leaves faster than it arrived. (more…)

The Right Side

A quote from one the best traders of our time, Jesse Livermore: “It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.”

Being a bull or a bear alone is meaningless out of the crucial context of the current market conditions. All that really matters for the great game of speculation is being on the “right side”, knowing when the markets are in a bull or a bear trend and deploying your speculative capital accordingly.

Once again Livermore ties speculation back into the speculator’s own internal emotions. He points out that it makes no sense to be bullish or bearish as a rule, but to carefully watch the market conditions in order to be on “the right side” at any given moment. Most speculators are burdened with an innate emotional bias to be bullish that is dangerous and must be eradicated if they wish to succeed in speculation. (more…)

16 Trading Quotes -Must Read & Take Print Out

“The obvious rarely happens, the unexpected constantly occurs.” – Jesse Livermore

“A speculator is a man who observes the future, and acts before it occurs.” – Bernard Baruch

“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.” – William O’Neil

“Successful speculation implies taking risks when the odds are in your favor.” – Victor Sperandeo

“Stocks are bought not in fear but in hope. They are typically sold out of fear.” – Justin Mamis

“Accepting losses is the most important single investment device to insure safety of capital.” –Gerald M. Loeb

“To me, the “tape” is the final arbiter of any investment decision. I have a cardinal rule: Never fight the tape!” – Martin Zweig

“You have to master your ego & realize that being profitable is more important than being right.” – Martin Schwartz

“Losing a position is aggravating, whereas losing your nerve is devastating.” – Ed Seykota (more…)

Trading Wisdom – Jesse Livermore

[” . . . remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch.”]

Jesse Livermore reiterates the importance of buying with the primary trend and beginning new deployments in small increments. Since trends can run a long time, he wisely points out that absolute stock prices are really irrelevant for buying and selling decisions for speculators.

All that matters for speculators is today’s temporal position within the prevailing trend. If the trend has time to run yet then today’s prices really don’t matter. If you buy today on a bull trend that is not yet finished, odds are that your stocks will head to even higher prices before the trend reverses. Similarly if you short sell an already battered stock when a general bear trend hasn’t yet ended, then you will probably still earn a profit. The key is carefully watching the market conditions and keeping the pulse of the primary trend with which you are betting.

But, since we cannot know for certain how long a trend has left to run before it ends, it is wise to gradually scale in positions as Jesse Livermore taught. Start out by only deploying a fraction of your desired capital in your target bet. If you are right, and the profits come, then you can scale in more as time marches on. But if you are wrong and the markets move against you, the prudent use of scaling shields you from large losses and keeps your precious capital protected until a more opportune time.

3 Dos and Don’ts Most Traders Learn the Hard Way from Market Wizard Mark Minervini

The following article is an excerpt from Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market by Mark Minervini with permission from McGraw Hill Publishing.

How to Handle a Losing Streak

A losing streak usually means it’s time for an assessment. If you find yourself getting stopped out of your positions over and over, there can only be two things wrong:

1. Your stock selection criteria are flawed.

2. The general market environment is hostile.

Broad losses across your portfolio after a winning record could signal an approaching correction in a bull market or the advent of a bear market. Leading stocks often break down before the general market declines. If you’re using sound criteria with regard to fundamentals and timing, your stock picks should work for you, but if the market is entering a correction or a bear market, even good selection criteria can show poor results. It’s not time to buy; it’s time to sell or even possibly go short. Keep yourself in tune with your portfolio, and when you start experiencing abnormal behavior, watch out. Jesse Livermore said, “I’m never afraid of normal behavior but abnormal behavior.” (more…)

Recommended Books for Traders

As Jesse Livermore said: “Trading is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or for the get-rich-quick adventurer.” In other words, to excel in the stock market, you have to work hard, have emotional control, and develop confidence in your strategy. I constantly get asked to recommend books that can help with these areas of trading. There are so many good ones out there, but here are a few that I suggest.
(If you click on the titles, you can get a more detailed description from Amazon.com).
How to Make Money in Stocks (4th Edition), William O’Neil
How to Trade in Stocks, Jesse Livermore
Reminiscences of a Stock Operator, Edwin Lefevre
The Disciplined Trader, Mark Douglas
Trading in the Zone, Mark Douglas
Trader Vic-Methods of a Wall Street Master, Victor Sperandeo
Trader Vic II-Principles of Professional Speculation, Victor Sperandeo
How I Made $2,000,000 in the Stock Market, Nicolas Darvas
The Battle for Investment Survival, Gerald Loeb
Confessions of a Street Addict, James Cramer
There are 3 Market Wizards books all written by Jack Schwager:
Market Wizards
The New Market Wizards
Stock Market Wizards
Confidence and emotional control are extremely important in order to become a successful trader. I believe the ideas taught in the following “self-help” books can help develop that “mental toughness” that’s needed. The concepts learned can also be applied to many areas of our lives:
Think and Grow Rich, Napoleon Hill
You’ll See It When You Believe It, Dr. Wayne Dyer
The Power of Positive Thinking, Norman Vincent Peale
The Magic of Thinking Big, David Schwartz
Awaken the Giant Within, Anthony Robbins