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Jesse Livermore: Original Trend Follower and Great Trader

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The unofficial biography of Jesse Livermore was Reminiscences of a Stock Operator published 1923. Below are selected quotes:

  • Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
  • I told you I had ten thousand dollars when I was twenty, and my margin on that Sugar deal was over ten thousand. But I didn’t always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times. In fact, I have always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game- that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily- or sufficient knowledge to make his play an intelligent play.
  • It takes a man a long time to learn all the lessons of 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.
  • There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!
  • I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, Well, you know this is a bull market! he really meant to tell them that the big money was not in the individual fluctuations but in the main movements- that is, not in reading the tape but in sizing up the entire market and its trend.
  • The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
  • ?the average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.
  • To tell you about the first of my million dollar mistakes I shall have to go back to this time when I first became a millionaire, right after the big break of October, 1907. As far as my trading went, having a million merely meant more reserves. Money does not give a trader more comfort, because, rich or poor, he can make mistakes and it is never comfortable to be wrong. And when a millionaire is right his money is merely one of his several servants. Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss- that is what does damage to the pocketbook and to the soul.
  • What I have told you gives you the essence of my trading system as based on studying the tape. I merely learn the way prices are most probably going to move. I check up my own trading by additional tests, to determine the psychological moment. I do that by watching the way the price acts after I begin.
  • Of all speculative blunders there are few worse than trying to average a losing game. My cotton deal proved it to the hilt a little later. Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.
  • The loss of the money didn’t bother me. Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.
  • In booms, which is when the public is in the market in the greatest numbers, there is never any need of subtlety, so there is no sense of wasting time discussing either manipulation or speculation during such times; it would be like trying to find the difference in raindrops that are falling synchronously on the same roof across the street. The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privelege of proving conclusively that it cannot be found on this sordid earth. At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860’s and 70’s than in the 1900’s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.
  • There are men whose gait is far quicker than the mob’s. They are bound to lead- no matter how much the mob changes.

20 Trading Rules for your weekend

1.        KNOW THYSELF
What kind of trading style fits your personality…Trend following? Day Trading? Buy and hold (please NO)? Next, what do you want to accomplish with your trading…Monthly Income? Long-Term Growth? Risk Aversion? And finally, you must have a grip on your emotions, because you will experience failure and success in trading and you need to know how you will react to both.
 
2.        KEEP IT SIMPLE
You should be able to describe each trading strategy in your war chest on a 3×5 index card.  There are so many different trading tools and indicators out there that it is easy to make trading and investing harder than it is. Find a few technical and/or fundamental indicators that you can apply to your trading, and master them.
 
3.        DIVERSIFY 
Specialize in a few different trading strategies and then spread your risk out across multiple asset classes using those trading strategies. Make sure all of your trades are not dependent on the same sector, commodity, industry, or idea. 
 
4.        LOSERS AVERAGE LOSERS
Only losers add to losing positions. If a trade is going against you, move on and find another trade. It’s not about pride, it’s about profits.
 
5.       NEVER STOP LEARNING
 You must constantly make an investment in your trading education. Read books, go to seminars, or talk to other traders, because over time the traders that make a commitment to never stop learning will be the traders that stay in the game and are able to adjust their trading style to any market environment.   
 
6.        CREATE A TRADING PLAN
Having a trading plan creates discipline. Why are you making this trade? What’s your risk? What’s your reward? How much margin is required? What will you do if things get bad, or really good? These are questions you should be able to answer on every trade you execute.   
 
7.        BAD TRADE MOVE ON
I don’t care who you are, you are going to have bad trades. When you have a bad trade, take a break from trading, go to a movie, or kick the dog (once), but don’t sit around and pout.   It’s important that you move on and start planning how you are going to get it back. 
 
8.        TRADE WITH CONFIDENCE
Trust your research, feel confident in the time and energy you have put into your trading strategy and know that no matter what the market does in the short term, you have the ability to make money in the long term. 
 
9.        THE MARKET IS GOING…????
Nobody knows where the market is going and you don’t either.    So pick trading strategies that allow a little wiggle room in case you wake up one morning and the market doesn’t do exactly what you told it to. (See trade schools)
 
10.    DICSIPLINE
 This word sums up a long term trader. You must have the discipline to follow your systems and manage your emotions hour after hour, day after day, year after year. If you are undisciplined in other areas of your life, don’t be surprised if one day you break your trading rules. You must practice discipline 24 hours a day.  (more…)

THE GUESSING OF TRADING

Trading is based on our hypothesis. In other words trading amounts to our educated guesses, which means the more you invest in your education, the more likely you are to find yourself on the right side of the trade. One of the most widely overlooked parts of trading education by traders is the study of past charts. I make personal videos, so that like a football team I can review my plays and create better strategies.

Your chart will tell you almost every thing you need to know to get on the right side of the trade. The one thing it doesn’t tell you is what is going on behind the scenes and it will even give you a hint to that most of the time. Your bullish/bearish ENGULFING patterns are evidence that there are some secrets that the market keeps to itself.

Mastering your candlestick psychology, your support/resistance, and your trendlines are things that you want to major on and learn well. You may not win every trade, but having a firm foundation on these simple techniques can greatly increase your odds of a successful trade. I think the more simple your charts, the better and easier it is for you to enter a good trade.

Sometimes you will have the perfect trade set up and all of your analysis will be right and you will find yourself on the wrong side of the trade. No big deal, it happens to all of us, review that trade and see if you can identify the error. When you have reviewed it, look for the next trading opportunity. There is NO PERFECT TRADING STRATEGY!!!!!!! This is only a guessing game for those of us who like to play the odds. The better your education, the better your odds will be against the house.

Life and Markets

LIFEANDMARKETRespect is the first casualty in lost love.

Four industries dominate the economy: hope, escape, protection, and convenience.

Success is the point at which talent and skill meet opportunity.

The aim of all trading education: to encourage trading.

The printing press democratized the acquisition of knowledge; the computer has democratized its dissemination.

Date markets before deciding to marry them.

Anatomy of a bad trade: Hope, then despair.

Love, once present, never dies. It must be killed. (more…)

Rogue Trader Psychology

Jerome Kerviel. Rogue Trader. As this case unfolds, more and more information is being revealed. He was the quiet guy with a not-so-impressive education background. Many of his peers may have been picked from the prestigious Grandes Ecoles, the Harvards and M.I.T.’s of France, and wielded advanced degrees in math or engineering. Kerviel came to work with a business school background and started work in the bank in the back office. Can we learn a valuable lesson from this case? As personal “professional” traders (as opposed to institutional trading), are we guilty of being rogue traders every once in a while? No compliance department to answer to. No regulator breathing down your back.

Kerviel’s job was arbitrage: the art of exploiting tiny and momentary discrepancies in prices of very similar stockmarket instruments. To make money, the bank has to wager big volumes but the risk is usually small because each transaction is balanced with an equal and opposite one. The bank says he created fictitious accounts to make it look as though his bets that shares would rise had been covered. The bank was open to the risk prices would fall – they did. Kerviel was able to get away with it partly because SocGen’s risk systems do not check up on unregulated over-the-counter contracts straight away if no deposit is required, the bank said. Furthermore, the bank primarily looks at the net exposure to market prices rather than the total outstanding amount wagered. Bank risk experts say this approach is not peculiar to SocGen. To keep the checks at bay and continue trading, the dealer falsified documents and misappropriated passwords, SocGen said.

Rogue Trader Trading Psychology

Most would-be traders operating from home are either self-taught or taught from education package bought from a trading education company. We are very much like the rogue trader: we don’t have top class education, we have access to both the trading and the back office side of the business and we have the same psychological vulnerabilities. We are only human. It is easy to be seduced by money as much as Kerviel had been. It has been reported that he was attracted by the prospect of a 300,000 euro (US$503,778) performance bonus, but did not personally profit from any of the financial deals. He wanted that bonus. He may also wanted to keep up appearances with his peers.

Rogue trader psychology is one of delusion and illusions. The delusion of self in believing that taking on ridiculous levels of risk to “fix” a trade. Kerviel had taken a US$83 billion losing bet on European share prices. The illusions of a rogue trader include the belief that everything will go their way – the market will turn their way but when the time comes, the opportunity that they saw didn’t come into fruition – the mirage in the distance.

Back Office Rogue Trader

The problem was, rogue traders have access or knowledge about back office operations. It was the case with Nick Leeson in 1995 and also the case for Jerome Kerviel in 2008. Rogue trader’s can further their delusion by flexing the system to suit their reality. It was a total breakdown of the system.

Professional non-institutional traders don’t have the luxury of a compliance system. No compliance department to answer to. No regulator breathing down your back. No limits. They have 100% control over their own risk, their own compliance.

Lessons of Rogue Trader Psychology

Professional non-institutional traders aka traders operating from home; have to institute their own control systems. They must operate with their own trading rules taking into consideration what level of risks they are able to make. They must also consider how they will mitigate their own risks by creating a money and risk management system including stop losses and a buffer. Be wary when you do start flexing your own rules regarding risk. You may turn yourself into a rogue trader.

10 Trading Quotes

“Good investing is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake.“ –Michael Steinhardt

Do not stay bullish or bearish go with the current flow of the market>

“There is only one side of the market and it is not the bull side or the bear side, but the right side.”-Jesse Livermore

Putting it all together, it is more than just numbers>

“Successful trading depends on the 3M`s – Mind, Method and Money. Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology their own feelings and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options or futures as well as firm rules for pulling the trigger – deciding when to buy and sell. Money refers to how you manage your trading capital.” – Alexander Elder

The money is in the primary market trend, not jumping in and out>

“I think it was a long step forward in my trading education when I realised at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend.” – Jesse Livermore

This is one of the best ways i Know to measure short term trends, and be on the right side of the primary moves>

“The 10 day exponential moving average (EMA) is my favourite indicator to determine the major trend. I call this “red light, green light” because it is imperative in trading to remain on the correct side of moving average to give yourself the best probability of sucess. When you are trading above the 10 day, you have the green light, the market is in positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in a negative mode and you should be thinking sell.” – Marty Schwartz

Why it is so important to let your winners run and cut your losers short>

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you‘re wrong.” -George Soros

Eliminating the risk of ruin in one easy step>

By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.” Larry Hite.

Never add to a losing position becasue you are fighting the trend>

“Losers average losers.” this was posted in Paul Tudor Jones’ Office

This is successful stock trading summarized>

“My basic philosophy is: Expose your portfolio to the best stocks that the market has to offer and cut your losses very quickly when you’re wrong. That one sentence essentially describes my strategy.” – Mark Minervini

Trend Trading in a nut shell>

“It is always the best discretion to let the market show us where it is going and just simply follow (this would be prudent), rather than predict where the market is going and place a position (this would be gambling).” -Anne-Marie Baiynd

Always ask yourself: what did I learn from that loss?

Learn & Lead“The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don’t feel the pain of a loss, then you’re in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in the world without pain. Similarly, in the markets, if the losses don’t hurt, your financial survival is tenuous.”

Losses happen and they are part of our trading education. If you don’t learn anything out of them, it is money wasted. Always ask yourself: what did I learn from that loss? What could I do, not to repeat it again.

legendary speculator Jesse Livermore

legendary speculator Jesse Livermore on LETTING YOUR WINNERS RUN

(Chapter V) … “I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements – that is, not in reading the tape but in sizing up the entire market and its trend.”

In all of “Reminiscences” this crucial idea that the Really Big Money is always earned by prudently riding the large trends over time and not in day trading every minute fluctuation is one of the central themes of the book.

“be right and sit tight”

(Chapter V) … “And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.” (more…)

Eckhardt on Losses

The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don’t feel the pain of a loss, then you’re in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in the world without pain. Similarly, in the markets, if the losses don’t hurt, your financial survival is tenuous.”

Losses happen and they are part of our trading education. If you don’t learn anything out of them, it is money wasted. Always ask yourself: what did I learn form that loss? What could I do, not to repeat it again.

Trading Wisdom – Jesse Livermore

“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements – that is, not in reading the tape but in sizing up the entire market and its trend.”

In all of “Reminiscences” this crucial idea that the Really Big Money is always earned by prudently riding the large trends over time and not in day trading every minute fluctuation is one of the central themes of the book. Livermore hammers this again and again, attacking it from countless angles and spicing up all of his amazing lessons with his own enthralling personal experiences.

This old and successful speculator that Livermore mentions, Mr. Partridge, would always politely tell the younger speculators who asked him trading questions that it was a bull market. The young speculators were always eager to trade, but Partridge was old and battle-scarred enough to know that no mere mortal could even hope to catch every individual fluctuation so the wisest strategy was just to ride the major trends. His simple reply, which would annoy the youngsters since they couldn’t yet perceive the deep wisdom in it, was to subtly advise them to just ride the primary trend and not worry about rapid-fire trading.

If a particular market happens to be in a primary bull trend, then just be long and don’t worry about trying to interpret and trade upon the essentially random day-to-day market noise. If a particular market is in a primary bear trend, then either sit out in cash or stay short and wait for the trend to fully mature and run its course. Don’t try to frantically outguess the primary trend everyday, just accept it and trade with it and you will win in the end.

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