Jesse Livermore’s Methods of Trading in Stocks
If you want to be a profitable Trader, study Traders who have not only made enormous profits but also losses. One of those most successful Traders is Jesse Livermore. Every self-respecting Trader studied Jesse Livermore’s methods of trading in stocks.
What makes Jesse’s trading successes so much more memorable, is the fact that he traded on his own, funded his trading with his own capital and did it all with his own platform. Obviously have many things changed since Jesse traded, however are his rules still applied today by the most successful Traders.
This article contains some of the trading rules applied by Jesse Livermore which formed the basis of his trading success. You might also enjoy our blogs on fundamental analysis and Forex technical indicators to make the most of your trading.
Learn, apply, and master Jesse Livermore’s stock trading methods and in time watch your trading success take flight.
“There is nothing new in Wall Street. There cannot be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
The stock market is made up of all types of Traders. Human nature does not change that much over time. Off course there will be different circumstances in today’s market than there were almost hundred years ago, however the way people react to changes in the stock market will never change.
“Buy rising stocks and sell falling stocks”
There are very successful Traders and Investors in the world. Although you might become successful at going against the grain on the stock market, it is so much easier to just go with the flow. When a stock is moving in a certain direction it means that most of the Traders have the same idea of where the stock will go. If the majority thinks the stock will go higher, they will decide to buy, which causes the price to rise. Pick the stocks that are trading higher over time and you know that most of the Traders involved believe the price will continue to rise. Do not make it harder for yourself to go against everybody. Instead, learn to recognize the signs of when a stock starts to move so you can enter early. In that way you can profit the most from the big move the stock is going to make.
“Trade only when the market is clearly bullish or bearish”
It is better to follow the direction of a stock. The same goes for the overall market. Stock trading is hard enough to learn. So, there is no need to make it any harder than necessary. When the market has no clear direction, it is best to sit on the side-line. Just wait and see how the market is forming itself. The stock market is the average of all the stocks traded on the market. When the market is clearly trending in one direction it means that most of the stocks is heading in the same direction. Those are the easy picks for you. When the market has no clear direction there is no saying of what all the individual stock will do.
“Only enter a trade after the action of the market confirms your opinion and then enter promptly”
Before ever making a trade, you need to have your trade plan ready. Not only the reasons of why you want to enter the trade, but also when you should exit it. Be meticulous in your research and make sure the trade fits with your strategy. Create a trade plan for each trade that you want to make. After your trade plan is ready do not rush into the trade. Let the market confirm your thesis. And wait for the trade to expose itself to you.
“Continue with trades that show you a profit, end trades that show a loss”
You will probably end up with more than one active trade at most of the times. In those cases, it is important to remember to stay with your winners. For most traders it is too difficult to take a loss. First, they take their profit on a winning trade. And hold on to the losing trades. Hoping that those losing stocks will turn around and change in a profit. Off course hope is not a strategy for the stock market and hoping that a losing stock is going to turn around is just foolish. Do not try to fight the market.
“End trades when it is clear that the trend you are profiting from is over”
You have thought about every trade you make and have created a trade plan. When the market has confirmed your idea about the stock you finally decided to take a position. Now the most important thing is to be aware of all the changes that might make your trade plan worthless. Be prepared to sell your position when the market changes direction. When the confirmation the stock earlier showed is no longer there, there is only one thing you can do and that is to close your position.
“In any sector, trade the leading stock – the one showing the strongest trend”
In your research you have found a sector that is doing extremely well in the current market. You have decided to look for stocks in that market to trade. Why not only go for the best? Because the lesser stock might seem attractive at a certain time? Do not get tempted to do that. You need to make trading as easy as possible and the leading stock in the sector simply will give you the best chances of success.
“Never average losses by, for example, buying more of a stock that has fallen”
One of your position is showing a loss. What to do now? Maybe you should add to your position? You still think the stock should go higher. And the buy price is currently lower than the stock you already own. That sounds like a bargain, right? No! Keep your back straight and do not get lured into that loser’s game. The stock that is showing a loss is clearly saying to you that your entry point was wrong. There is no reason in the world why you would want to buy more of something you were wrong about.
“Don’t become an involuntary investor by holding onto stocks whose price has fallen”
When your trade is not working out and your position shows a loss it is hard to cut it. For us human beings it is extremely difficult to accept our faults. Especially when they will cost us money. But do not be tempted to turn a trade into an investment by holding onto stocks. If you are looking for investments, you should have started with a different set of criteria. You started with a trading view of point. Is the stock not confirming your thesis? Get out of it instantly. Learn from it and start looking for the next opportunity.
“Markets are never wrong – opinions often are”
Never argue with the stock market. Even if your research was so meticulous. And you are 1000% certain the stock must move in a certain direction. When the market is showing you something else you need to get out of your trade. Your thesis might be proven to be right in the future. Apparently currently the market disagrees. And there is no discussion about it.
“The highest profits are made in trades that show a profit right from the start”
This is a very important rule to remember. All our best trades have shown a profit right from the moment we bought the stock. The profit simply confirms that your idea about the stock and price action is completely right. Treasure these trades and let them ride if you can.
“No trading rules will deliver a profit 100 percent of the time”
There are no guarantees in the stock market. All you need to be looking for is to be profitable. Accept the fact that you will never be right 100% of the time. Accept that you are going to need to take losses. Focus on the long-term profitability of your trades. Even with a winning percentage of less than 50% you can be profitable in the long term. Most of this has to do with your risk and money management.
“As long as a stock is acting right, and the market is right, do not be in a hurry to take profits”
Do not feel rushed to take profit on a position that is still moving in the right direction. It is good to secure some of the profit so that you never let a profit turn into a loss. But do not sell your whole position when the price action on your stock is still strong.
“Never buy a stock because it has had a big decline from its previous high”
It can seem tempting to buy a stock when it is down a lot from its previous high. Off course when there is nothing changed in the company it might be a good investment to bottom feed. For a trader this is never a good sign. There must be a reason why the market has dumped the stock that hard. And there is no guarantee that the stock will return to its highs. It can still go lower and even go bankrupt in the end.
“Never sell a stock because it seems high-priced”
Almost the same goes for selling a stock because it seems to be high-priced. Or because it has had such a big rise in the last time. Both are no reasons to sell a stock. The only reasons the sell a stock is when you get signs from the market that the sentiment for the stock is turning. That might be a declining interest in buying power for the stock. Or even a turnaround an increase of sellers on the market. The rise is has made, or the high price the stock has can never be the reason to sell.
“The human side of every person is the greatest enemy of the average investor or speculator”
This is one of my favourite quotes from Jesse Livermore. Because it is so true and overlooked by most of us traders. The technical side of trading is simple to understand and learn. Applying your trading rules starts to become harder, because now your emotions are getting involved. Although the hardest part is sticking to your plan and rules when things get though. Those are exactly the times that your trading plan and trading rules are the most important. And the hardest time to stick to them. You need to learn to control your emotions to become successful in the stock market.
“Wishful thinking must be banished”
Hope and wishful thinking are not strategies. Keep to the facts that your research and the market shows. Hoping that things will turn out in right way is not going to generate profits.
“Big movements take time to develop”
Although the most successful Trades potentially show a profit right from the start, the big movements take time to develop. Mainly because the big trading institutions on the stock market cannot take a position within a day. Or even a couple of days or weeks. Sometimes it takes months for them to take the position they want. And all that time the stock is moving in that direction. When a stock is acting right you must be patient and let it ride until it there are reasons to exit your trade.
“It is not good to be too curious about all the reasons behind price movements”
Most of the time it is very good to understand the reason behind price moves of stocks. Also, because when you know what moves stocks you can anticipate on those events in an early stage. But sometimes it is hard to find the reason behind price movement. And as a trader that is OK. If the stock moves, you can profit from it. If you have learned to read the price action you do not need to know the reason behind all price moves. Just know how to profit from them.
“It is much easier to watch a few than many”
Keep your watch list manageable. When doing your research, it is easy to find stocks that might look interesting and add them to your watch list. Especially because you are afraid to miss out on the big moves. As your watch list grows it becomes harder to keep an eye on all of them. Resulting in not being able to create a solid trade plan for any of them. It is better to stick to a few stocks that you can manage as appose to many that you struggle to control.
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