Lessons From Livermore – 4 Things Learnt From A Great Trader

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The Boy Plunger


This article talks about 4 things we can learn from one of the most talked about traders in the world – Jesse Livermore.
One of the first books which fascinated and terrified me at the same time was “Reminisces of a Stock Operator” a book on Jesse Livermore.
You can buy the book on Flipkart here. & on Amazon.in here

Considered as one of the stalwarts of trading, at the time was worth about 100 million – he owned his own estate, gardens, Yatchs, Rolls Royce and even his own private carriage. In today's times his worth would be equivalent to at-least 2 Billion dollars. He lived in times of inefficient markets, in times when it took half a day for information to travel to base your trades on. We live in the information age where data not only travels within seconds, flash trading used to allow people to get information before anyone else to put on trades in exchange for a premium. Livermore also was frequently troubled by poor broker execution, he lost several times because his broker was unable to get a decent fill, or failed to get anything at all. Are we not lucky to use excellent broking services with the advent of the internet and online transactions.

Jesse did not have the convenience of modern-day charts to graph his price patterns. Instead, the patterns were simply prices that he kept track of in a ledger. He, as I believe was a chartist (through tape reading and jotting down prices). He used (the data) charts to time his entry, he sensed demand a supply based on the quickness of the move and fundamental analysis to zero in on what stock/commodity to trade.

I would love to hear your thoughts in the comments below.


Truth be told, he was and still fascinates me – here are 4 things I have learnt from Livermore.

1. Markets Don’t Change –Patterns repeat, people haven’t changed for thousands of years

All markets, whether it be commodities, forex, stocks or even to some small effect bonds – have one thing in common ‘People’. These are the same people that run the companies, analyse balance sheet, hunt stocks for value picks, trade, get greedy, get scared and do it again and again in all kinds of markets.
Livermore believed that market’s around the world are ruled by a major chunk of influence, that influence being emotion. I completely endorse this viewpoint, be it long term investing or short term speculation your trading will leave a footprint in the sands of time. If you can accurately measure the inflow and outflow of money to judge greed or panic fear then you understand the market better than most.

Jesse once said “I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator; that hope, fear, and greed are always present, sitting on the edge of the psyche, waiting on the sidelines, waiting to jump into the action, plow into the game.”


2. News Follows Price

I can hear TV anchors and ‘analysts’ cringe at this statement. I myself am guilty of being part of the ‘talking heads’ on TV. Something I despised for a long time – The media industry is in the business of viewership. They will do anything to spill headlines on the clean labcoat of investing. They will find a reason why the market went up or down, and when they can’t find a reason they will make up one. Many times, as said in his book a commodity rallied up quickly for no apparent reason after which there was major news of a shortage in the supply of the commodity (a bullish sign). This has been crystallized in the following quotation

“I never try to predict or anticipate. I only try to react to what the market is telling me by its behaviour.”

“Of course there is always a reason for fluctuations, but what the tape does not concern itself with the why and wherefore. It doesn't go into explanations. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now - not tomorrow. The reason can wait. But you must act instantly or be left.”

In summary: Trade what you see on the chart, don’t be distracted by other inputs. Too many inputs causes confusion and analysis paralysis. Do one thing at a time.


3. Trade Only What You Can Manage!

Even after approaching a decade in trading I still cannot manage to handle more than 3 trades at a time. My ideal number would probably be two, number of trades would be drastically less that you would expect a swing trader to have. I believe there is power in trading quality and managing only what you can handle properly. I learnt that Livermore also felt the exact same thing.

Jesse Livermore believed 
“Keep the number of stocks you own to a controllable number. It is hard to herd cats, and it is hard to track many securities. Take your losses quickly and do not brood about them. Try to learn from them but mistakes are as inevitable as death.”

4. Follow The Damn Trend

I have said it in my articles, to my friends, on TV and even read it in countless articles and interviews. I am a life long learner and one thing which I can swear by is to never go against the trend. Livermore in his book also entails brooding about a particular trade which he took out of excitement and went against the trend. He held on in sheer stubbornness only to make a huge loss finally cutting the position free.
Trend following’s main principal is to buy when there is overall demand (uptrend) and to sell short when there is overall supply (downtrend). Trend following also shirks ‘trading’ for a few points and focuses on a larger risk reward. I am an ardent trend follower and aim for a greater profit for each rupee risked.
We can observe the same in the book on Livermore:

“Much more to the game of speculation than to play for fluctuations for a few points.”

“"Well this is a bull market, you know!"[Said his friend],
[Livermore then thought] - He really meant to tell them that the big money was not in individual fluctuations but in the main movements - that is not in reading the tape but in sizing up the entire market and its trend.”

“Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend. A prudent speculator never argues with the tape. Markets are never wrong opinions often are.”

Experienced Traders Can Go Broke Too – Always Manage Risk

Livermore is known for going broke several times during his career. If you analyse which trades made him lose large portions of his fortune you will notice that they were one or two bad trades. In He lost $ 3 million he had made in the 1907 crash because of a single trade in Cotton. He refused to exit his losing position and kept buying as the cotton market collapsed, this was against his rules and cost him a large fortune. Starting again with a greatly diminished portfolio, he was able to ride the World War I-driven bull market to another large trading stake. His legendary status was cemented when he successfully shorted stocks during the great crash of 1929, earning over $100 million.

Make sure you do not risk more than 1% per trade or else you could face similar losses or even risk going broke due to overleveraging your positions.

My Take Away From Jesse Livermore's Life

Livermore’s story Is a great insight into the life of a full time trader. He talks about trades in details, his fears, the mistakes he made and what he learnt. You can also see the evolution of a trader who started at bucket shops looking to make a few points frequent trades to a more successful trader who looked at larger swings and greater risk reward ratios. I would say that most of his life was Not successful, he seemed to be consumed by inner devils which we know very little of. Perhaps the true measure of a man is the ability to balance balance love, family and business.
He committed suicide with a note saying “My life has been a failure”

What is the path of a successful trader?

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