Jesse Livermore is an icon in the world of stock trading. While trading his account, he made more than$100 million dollars during the 1929 stock market crash. That equates to a billion dollars or more in today's currency, depending on which index you use, and he wasn't a hedge fund, nor was he trading other people's money.
Key Takeaways
- Jesse Livermore made more than$100 million dollars during the 1929 stock market crash. He had five main trading rules.
- His rules were: only buy strong stocks in a bull market and short, weak stocks in a bear market; and if you don't have a trade setup, don't trade.
- The other rules were: trade with stop-loss orders, and know what that level is before you take a trade; don't average down, and don't follow too many stocks.
A Quick Biography
Jesse Livermore was born in 1877, and even though technology has changed a lot since his time, his bookHow to Trade in Stocks, and the book which chronicles his early trading career (his name is changed in the book) Reminiscences of a Stock of Operator by Edwin Lefèvre, still offer a ton of valuable insight to traders.
Jesse Livermore ultimately became a swing trader and longer-term trader, but he started as a day trader, and this is where he made his first fortunes. The following five tips were offered by Jesse and day traders can surely use them. This trading advice may be almost 100 years old, but it's as relevant as the day it was conceived.
The 5 Trading Lessons
Only Buy Strong Stocks in a Bull Market and Only Short, Weak Stocks in a Bear Market
Bull and bear markets happen when stock prices are rising or falling overall, respectively. Stocks, as a whole or market, are represented by a major index, such as the S&P 500 in the U.S. Therefore, when this index is in an uptrend, focuson taking long trades in the stocks which are strongest. When the index is in a downtrend, focus on taking short trades in stocks that are the weakest.
You shouldn't be making these trades arbitrarily; they need to be based on a sound tradingstrategy. The above helps you figure out which stocks to trade.
If You Don't Have a Trade Setup, Don't Trade
Developing a strategy and a trading plan takes time and work, but once in place, all you need to do is follow it. If the market isn't providing trade setups based on your trading plan, then you shouldn't trade.
Trade With Stop Loss Orders, and Know What That Level Is Before You Take a Trade
Any trade could be a loser, no matter how good it looks at the outset. Always use a stop loss order, and make sure that it gets you out of the trade if the stock drops to your stop loss price level. Successful day traders don't waffle about when they should exit. They know when, where, and how they're going to get out before they even place the trade.
Don't Average Down
Averaging down is when you add money to a losing a position. If you already have a full position (the maximum size position your trading plan allows) then adding to that position when it's losing money is a significant lapse in discipline. Averaging down can deplete your capital very quickly, especially if done multiple times, as the price keeps going against you.
"I have warned against averaging losses. That is a most common practice.
Great numbers of people will buy a stock, let us say at 50, and two or three days later if they can buy it at 47 they are seized with the urge to average down by buying another hundred shares, making a price of 48.5 on all.
Having bought at 50 and being concerned over a three-point loss on a hundred shares, what rhyme or reason is there in adding another hundred shares and having the worry double when the price hits 44?"
Don't Follow Too Many Stocks
Don't dilute your focus and efforts by following too many stocks. Instead, focus on trading the strongest stocks in a bull market andthe weakest stocks in a bear market. It limits the number of stocks you trade to a handful. Any more than that, and it becomes hard to track them all and trade them adequately. The more stocks being watched, the more likely it is you'll miss the important moves you're waiting for.
Trading Successfully
Jesse Livermore was an extremely successful trader, but he also experienced the downside by losing and regaining his large fortune several times. He blamed his losses on just two things he had overlooked:
- He had not fully formulated his trading rules
- He did not follow his rules
These two problems still likely cause traders to incur losses today, as they always have. Livermore was a big proponent of developing a trading system and making sure to stick to it when trading.
FAQs
Jesse outlined a simple trading system: wait for pivotal points before entering a trade. When the points come into play, trade them using a buffer, trading in the direction of the overall market. Let the price dictate your actions and stay with profitable trades until there is good reason to exit the trade.
What are the five important steps of trading? ›
The Five-Step Process Behind Every Trade
- Step One: Discovery. Goal: Find potential stocks to trade. ...
- Step Two: Analysis. Goal: Analyze a set-up to determine if there is a trade opportunity. ...
- Step Three: Game Planning. Goal: Plan your trade. ...
- Step Four: Execution. Goal: Trade your plan. ...
- Step Five: Post-Trade Analysis.
Jesse Lauriston Livermore (July 26, 1877 – November 28, 1940) was an American stock trader. He is considered a pioneer of day trading and was the basis for the main character of Reminiscences of a Stock Operator, a best-selling book by Edwin Lefèvre.
What is a famous quote from the reminiscences of a stock operator? ›
If a man didn't make mistakes he'd own the world in a month. But if he didn't profit by his mistakes he wouldn't own a blessed thing. The game of speculation is the most uniformly fascinating game in the world.
What is the simplest trading strategy ever? ›
A simple method which doesn't require any analysis or indicator: Open a trade in the direction of the daily candle any time during the day in your own time zone. Don't put a limit. Put a stoploss equal to the length of the candle.
Who is the world's number one trader? ›
George Soros
George Soros, often referred to as the «Man Who Broke the Bank of England», is an iconic figure in the world of forex trading. His net worth, estimated at around $8 billion, reflects not only his financial success but also his enduring influence on global markets.
What is the 3 5 7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What are the three golden rules of trading? ›
Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.
What is the first rule of trading? ›
The most basic rule when starting to trade is to stick to a specific plan. You must take guidance from an experienced trader, plan your investment strategy and then work according to it. You must create your trading strategy by keeping in check all the scenarios that can occur in the market when investing your money.
Has anyone ever gotten rich from day trading? ›
Can you make money day trading? Most of the time, day trading is not profitable, but it can be profitable. Investors sometimes succeed at predicting a stock's movements and raking in six-figure profits by accurately timing the market.
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
How many day traders get rich? ›
Day traders are more likely to experience a 50% loss than a 50% gain. While there is potential for large gains, there is also a significant chance of significant losses. This is an important point to consider for anyone considering day trading as an investment strategy. Only 3% of day traders make consistent profits.
What was Warren Buffett's famous quote? ›
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
What was Warren Buffett's quote? ›
Warren Buffett Motivational Quotes
- “The most important thing to do if you find yourself in a hole is to stop digging.”
- “Price is what you pay, value is what you get.”
- “The most important quality for an investor is temperament, not intellect.”
- “Remember that the stock market is a manic depressive.”
It is said that Newton was so distraught by his losses that he remarked, “I can calculate the motion of heavenly bodies, but not the madness of people.” Newton's experience with the stock market had a profound impact on him, and he became hesitant to invest in the market again, even as the British economy rebounded ...
What was the original Turtle trading strategy? ›
Turtles were taught very specifically how to implement a trend-following strategy. The idea is that the "trend is your friend," so you should buy futures breaking out to the upside of trading ranges and sell short downside breakouts. In practice, this means, for example, buying new four-week highs as an entry signal.
Was Jesse Livermore a technical trader? ›
Initially, he was a purely technical trader. His system gave predictions for the short-term stock price movement. However, his trading style refined over the years as he continuously studied the markets. At 21, Livermore amassed the equivalent of $686,000 and was banned from the bucket shops.
How did Jesse Livermore make money? ›
Jesse Livermore ran away from home to pursue his dream of trading in the stock market, making his first profits by betting at bucket shops, before eventually making it to New York and becoming a renowned trader, despite initial struggles.
What is the King Keltner trading strategy? ›
What Is the King Keltner Trading Strategy? The King Keltner Trading Strategy combines Keltner Channels with indicators like the 20-period EMA and ATR to predict trends. It generates short-term signals using a 10-period EMA and ATR, emphasizing customized risk management for stop-loss and take-profit levels.
