Jesse Livermore: Lessons From a Legendary Trader

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Jesse Livermore: Lessons From a Legendary Trader

Who Was Jesse Livermore?

Jesse Livermore, born in 1877, is one of the best traders that few people are aware of. While Edwin Lefèvre’s biography, Reminiscences of a Stock Operator (1923), is widely recognized as a must-read for all traders, it needs more than a passing suggestion.

Livermore, the author of How to Trade in Stocks (1940), was regarded as one of the best stock traders of all time. Jesse Livermore was valued $100 million in 1929, which is nearly $1.5 billion in today’s terms.

Key Takeaways

  • Jesse Livermore was a stock trader who earned a fortune of $100 million ($1.5 billion in today’s money) at the zenith of his career in 1929.
  • Livermore traded on his own, using his own money and method, and without utilizing anybody else’s money.
  • Livermore preferred to trade equities that were moving in a trend and avoided range markets. He waited to watch how prices responded as they reached a tipping point.
  • Price trends and volume analysis were also employed to assess if the deal would be closed.
  • Jesse was highly successful but also lost his fortune several times, usually from not following his own rules.

Understanding Jesse Livermore’s Trading Strategies

The magnitude of his achievement is magnified when you realize that he traded on his own, using his own finances and method, and without utilizing anybody else’s resources. Without a doubt, things have changed since Mr. Livermore traded equities and commodities. In comparison to today, markets were lightly traded, with erratic fluctuations. Jesse mentions significant equities dropping many points with the acquisition or sale of 1,000 shares.

Despite the passage of time, his guidelines remain valid, and the pricing patterns he sought are still extremely important today. We’ll look at a synopsis of Jesse’s trading patterns, as well as his timing indications and trading rules.

Price Patterns

Jesse lacked the ease of modern-day charts for graphing his pricing trends. Instead, the patterns were just prices, which he recorded in a ledger. He preferred to trade equities that were moving in a trend and avoided range markets. He waited to watch how prices responded as they reached a tipping point.

For example, if a stock hit a low of $50, rallied up to $60, and was now moving back down to $50, Jesse’s principles required waiting until the key point was in play before trading. If the same stock rose to $48, he would launch a short transaction. If it rebounded off the $50 level, he’d go long at $52, keeping an eye on the $60 level, which is also a “pivotal moment.”

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A increase beyond $60, for example, would result in an addition to the position (pyramiding) at $63. Long holdings would be liquidated if they failed to breach or hold above $60. In this example, the $2 buffer on the breakout is not perfect; the buffer will vary depending on stock price and volatility. One want a buffer between the genuine breakout and entrance, allowing them to enter the move early but resulting in fewer fake breakouts.

Jesse did not trade ranges, but he did trade breakouts from ranges. He utilized a similar method to the one described above, entering on a new high or low but with a buffer to decrease the possibility of false breakouts.

Price trends and volume analysis were also employed to assess if the deal would be closed. Jesse used the following factors to assess whether he was in the appropriate position:

  • Volume increased on the breakout.
  • Prices should advance in the breakout direction in the first few days after the break.
  • Prices retrace considerably against the trend in a natural response, although volume is lower on retracements than it was in the prevailing direction.
  • Volume rises in the direction of the trend when the usual response ceases.

Deviations from these patterns were warning signs, and if confirmed by price movements back through crucial areas, they suggested that gains should be taken, whether realized or unrealized.

Timing the Market

Any trader understands that being correct a bit too early or a little too late may be just as damaging as being wrong entirely. In the financial markets, time is everything, and nothing gives greater timing than pricing. The crucial milestones stated above occur in individual equities as well as market indices. Allow the price to validate the deal before taking huge positions.

Jesse Livermore thought that no matter how much we “feel” we know what is going on, we must wait for the market to corroborate our hypothesis. Only then do we make our deals, and we must do it quickly.

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Trading Rules

The trading guidelines that follow are straightforward and have been included into various trading programs by many traders since their inception about a century ago. They are still relevant today, because to Jesse’s truism: “Nothing has changed on Wall Street. There can’t be, since conjecture is as ancient as the hills themselves. Whatever occurs in the stock market today has occurred before and will occur again.”

  • Follow the trend. In a bull market, buy; in a bear market, sell.
  • When there are no obvious opportunities, do not trade.
  • Use critical spots to trade.
  • Before entering, wait for the market to corroborate the view. Patience results in “huge money.”
  • Allow profits to run. Close transactions that result in a loss (good trades generally show profit right away).
  • Trade with a stop loss and be aware of it before entering the market.
  • Exit transactions if the likelihood of more gains is bleak (the trend is over or waning).
  • Trade the sector leaders; trade the best stocks in a bull market or the worst stocks in a bear market.
  • Avoid averaging down a losing position.
  • Don’t satisfy a margin call; instead, close the position.
  • Don’t follow too many stocks.

Lessons Learned

Jesse was a wealthy man who lost his riches multiple times. He was always the first to confess when he made a mistake, and when he lost money, there were only two possible causes:

  1. The trading regulations were not properly developed (not the case for most of his losses).
  2. The rules were not followed.

For today’s traders, they are most likely the reasons holding back earnings. To be lucrative, a trader must first devise a profitable trading method and then follow it in practice.

Livermore lost his whole money at the end of his life and was surviving off of family pensions.

Jesse described a straightforward trading strategy: wait for critical moments before placing a transaction. When the points come into play, use a buffer to trade them in the direction of the general market.

Allow the price to drive your actions and stick with lucrative transactions until there is a compelling cause to leave. Losses should be kept to a minimum, and trading should be avoided when there are no obvious possibilities. When trading chances arise, trade the equities that are most likely to move the most.

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Jesse Livermore FAQs

Was Jesse Livermore a Day Trader?

Jesse Livermore started his trading career as a day trader but progressed to swing trading and long-term trading.

How Did Jesse Livermore Manipulate the Stock Market?

By influencing the pricing of lightly traded stocks in bucket shops, Livermore influenced the stock market. He picked corrupt bucket shops to deal with since bucket shops refused to cooperate with him anymore because bucket shops were not established to lose money, but rather because Livermore was successful and amassing a fortune.

Livermore would conduct a transaction at the bucket shop on a stock that was sparsely traded on the NYSE. He would then trade the stock on the exchange, causing it to move dramatically in the desired direction, and collect the earnings from the bucket store.

He would manipulate the market in a variety of methods, including aggressively shorting a stock or commodity to push down the price, as well as “painting the tape.”

How Quickly Did Jesse Livermore Make Money?

Livermore began trading when he was 14 years old, earning his first profit of $3.12 at the age of 15 and $1,000 later at the same age. He earned $10,000 when he was 20 years old. He continued to make and lose money, finally building a wealth that peaked in 1929, when he shorted the stock market, profited from the stock market collapse, and made $100 million.

Who Taught Jesse Livermore?

Jesse Livermore was a self-taught trader who learned to build his own tactics as he traded stocks, discovering what worked and what didn’t by trial and error.

How Much Did Jesse Livermore Make in the Great Depression?

Jesse Livermore gained $100 million during the Great Depression by shorting stocks during the 1929 Stock Market Crash.

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