rss

Jesse Livermore with Edwin Lefevre, dated circa 1922

JL-ASRWhat follows is a never before published “interview” with Jesse Livermore.

Conducted by Edwin Lefevre, dated circa 1922, this “interview” reveals great insights into the mind of the famous trader. As we will see, the wisdom imparted here could change our entire perspective on the speculative game we love and enjoy.  It might even change our lives.  I took the liberty of editing it due to its length.

Lefevre:  Hello Mr Livermore.  Thank you for taking the time to conduct this series of interviews with me.  It is my understanding that you do not grant many interviews, so I am honored.

Livermore: You are very welcome.  I appreciate the respect but you do not have to address me as Mr.  Jesse, or my nickname, the boy plunger, will suffice.

Lefevre: And where did you get the name boy plunger?

Livermore: It was during the early days when I was trading small lots in the bucket shops, where the man who traded in twenty shares at a clip was suspected of being J.P. Morgan traveling incognito.  I didn’t have a following.  I kept my business to myself.  As it was, it did not take long for the bucket shops to get sore on me for beating them.  I’d walk in and plank down my margin, but they’d look at it without making a move to grab it.  They’d say nothing doing. That is when they started calling me the boy plunger.  I had to move from shop to shop, even to the point of changing my name.  I couldn’t put trades on without getting cheated on the quotes.  This was in Boston, so I then moved to where the real action was, to New York.  I was 21 at the time.

Lefevre:  Were you making money? (more…)

The Difference Between A Good And A Bad Trader: What Brain Imaging Reveals

The age old question: what is the difference between a good trader and a bad trader… aside from the P&L at the end of the day of course.

While luck has always been a major component of the equation, figuring out just what makes one trader successful, while another blows all his funds on a trade gone horribly bad has always been the holy grail of behavioral finance. Because if one can isolate what makes a good trader “ticks, that something can then be bottled, packaged and resold at a massive markup (and thus, another good trade) in the process making everyone the functional equivalent of Warren Buffett.

Or so the myth goes. Alas, the distinction between the world’s only two types of traders has been a very vague one.

Until now. (more…)

Two Mistakes frequently made by Stock Traders

The first big mistake is the flawed logic of extrapolation. Many traders and investors assume that a trend will remain in force until an “event” comes along to change it. But market trends are not like billiard balls on a pool table. This false assumption will put you on the wrong side of the market more times than not, especially at major turning points.

The second big mistake is to suppose that news events drive market trends. In fact, the opposite is true: economic, political and social events lag market trends.

Ten Laws of Technical Trading

1. Map the Trends

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you’re trading in the same direction as the intermediate and longer term trends.

2. Spot the Trend and Go With It

Determine the trend and follow it. Market trends come in many sizes – long-term, intermediate-term and short-term. First, determine which one you’re going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you’re trading the intermediate trend, use daily and weekly charts. If you’re day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.

3. Find the Low and High of It

Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old “high” becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies – the old “low” can become the new “high.”

4. Know How Far to Backtrack

Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.

5. Draw the Line

Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes. (more…)

Sir John Templeton 16 Rules For Investment Success

Interesting set of rules from legendary investor John Templeton:

1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often

 Complete explanation after the jump (more…)

Bull vs Bear Market

Bull Markets: Fear of missing out.
Bear Markets: Fear of being in.

Bull Markets: Everything I buy is going up — I’m a genius.
Bear Markets: Everything I buy is going down — I’m an idiot.

Bull Markets: See, fundamentals always win out.
Bear Markets: See, technicals and sentiment rule the markets.

Bull Markets: I knew I should have had more of my portfolio in stocks.
Bear Markets: I knew I should have had more of my portfolio in bonds.

Bull Markets: That guy’s been calling for a crash for years — he’s an idiot.
Bear Markets: That guy just called the crash — he’s a genius. (more…)

Bull Markets vs Bear Markets

Bull Markets: Fear of missing out.
Bear Markets: Fear of being in.

Bull Markets: Everything I buy is going up — I’m a genius.
Bear Markets: Everything I buy is going down — I’m an idiot.

Bull Markets: See, fundamentals always win out.
Bear Markets: See, technicals and sentiment rule the markets.

Bull Markets: I knew I should have had more of my portfolio in stocks.
Bear Markets: I knew I should have had more of my portfolio in bonds.

Bull Markets: That guy’s been calling for a crash for years — he’s an idiot.
Bear Markets: That guy just called the crash — he’s a genius.

Bull Markets: I want to be a long-term buy and hold investor.
Bear Markets: I want to be a short-term trader. (more…)

Bull Markets vs. Bear Markets :Some Facts

Bull Markets: Fear of missing out.
Bear Markets: Fear of being in.

Bull Markets: Everything I buy is going up — I’m a genius.
Bear Markets: Everything I buy is going down — I’m an idiot.

Bull Markets: See, fundamentals always win out.
Bear Markets: See, technicals and sentiment rule the markets.

Bull Markets: I knew I should have had more of my portfolio in stocks.
Bear Markets: I knew I should have had more of my portfolio in bonds.

Bull Markets: That guy’s been calling for a crash for years — he’s an idiot.
Bear Markets: That guy just called the crash — he’s a genius.

Bull Markets: I want to be a long-term buy and hold investor.
Bear Markets: I want to be a short-term trader.

Bull Markets: I’m glad I was buying during the last market crash.
Bear Markets: Never try to catch a falling knife.

Bull Markets: I’ll sit tight when the market falls.
Bear Markets: Dear Lord, get me out of stocks NOW!

Bull Markets: Time to buy stocks?
Bear Markets: Time to sell stocks? (more…)

Ed Seykota Quotes

Markets
The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.
Short-Term Trading
The elements of good trading are cutting losses, cutting losses, and cutting losses.
Outcomes
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
I think that if people look deeply enough into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it.
Market Trends
The trend is your friend except at the end where it bends.
Charles Faulkner tells a story about Seykota’s finely honed intuition when it comes to trading: I am reminded of an experience that Ed Seykota shared with a group. He said that when he looks at a market, that everyone else thinks has exhausted its up trend, that is often when he likes to get in. When I asked him how he made this determination, he said he just puts the chart on the other side of the room and if it looked like it was going up, then he would buy it… Of course this trade was seen through the eyes of someone with deep insight into the market behavior.
Predicting the Future
If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.
Trading
To avoid whipsaw losses, stop trading.
Here’s the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don’t play.
Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.
Markets are fundamentally volatile. No way around it. Your prolem is not in the math. There is no math to ge you out of having to experience uncertainty.
It can be very expensive to try to convince the markets you are right.
System Trading
Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. (more…)

The Complete Turtletrader by Michael Covel

Book summary:

The famous turtle program was the fruit of the debate between Richard Dennis and William Eckhardt, on the issue of whether traders are can be nurtured. Dennis believed it can but Eckhardt thought otherwise. Hence, they decided to make a bet by recruiting people from diverse background and most without experience. The book covered the entire story of the turltes, from the beginning of the program to what happened after the program. Instead of summarizing the process of how the turtles were hired etc, I will only focus on the information and attributes that makes one a good trader which I picked up from the book. In addition, I will introduce the turtle trading method.

What makes a successful trader?

Courageous probability trader

A successful trader thinks in terms of odds and always enjoys playing the game of chance. He or she will experience losses but must be able to hold the nerves and keep trading like they have yet lost. Richard Dennis was $10mil down in a single day but was able to finish off with a $80mil profit for the year. Something that makes “mere mortals lose sleep”. It was said that great traders like Dennis, process information differently from majority of the investors. He does not take conventional wisdom for granted or accept anything at face value. “He knew that traders had a tendency to self-destruct. The battle with self was where he focused his energies.” During the interviews with the potential turtles, one of the abilities he was looking for was “to suspend your belief in reality”.

“Great training alone was not enough to win for the long run. In the end, a persistent drive for winning combined with a healthy dose of courage would be mandatory for Dennis’s students’ long-term survival.”

Eckhardt emphasized that they are not mean reversion traders who believe the market will always return to the mean or fluctuate around the mean. Dennis and co. believe the market trends and often come unexpected, which also means the payout will be very rewarding.

Emotionless and disciplined

Dennis taught the turtles not to think trading in terms of money so they can detach themselves from it and no matter what their account size, they would still be able to make the correct trading decisions.

The turtles were taught to be trend followers where they used a system of rules to tell them the bet size, entry and exit points. Rules “worked best” as they eliminate human judgements which do not work well in the market. That being said, even if rules are followed religiously, traders are not expected to be right all the time and it is crucial that they cut their losses and move on when they are wrong. It is important to make every trade a good trade rather than a profitable trade. As long as good trades are made, profits will come in the long run. (more…)