Updated: Feb 21, 2022
Jesse Livermore is one of the most famous traders in the history of the world.
The story of Jesse Livermore in Reminiscences of a Stock Operator book is must-read information for all the traders.
He made several million dollars during the 1907 and 1929 market crashes. He was carrying a massive short position during the 1929 crash and made over 100 Million Dollars, which is equivalent to 1.5 Billion in today's dollars.
Unfortunately, his life takes a bad ending as he commits suicide after his third marriage.
There are many debates around this topic, but I would like to focus only on the powerful lessons that anyone can use as trading principles.
(Image Source - The Duomo Initiative on Medium)
1. A prudent speculator never argues with the tape. Markets are never wrong, but opinions often are.
Nowadays, I am quite active on Quora, and every day I get many questions like – “Why XYZ stock is falling despite good results?”, “Why is Nifty going upside in this pandemic situation?” and I feel helpless by looking at the mindset of such people.
They have a view (bullish or bearish) on a stock. Most people develop this view after reading a piece of information in a newspaper or watching a news channel.
Whenever the market moves in the opposite direction, they get these kinds of questions in their minds. Hence, they ask it on Quora or any other platform.
It indicates that they are not in a situation to accept their analysis has gone wrong, and they can’t tolerate the price movement in the opposite direction.
Jesse also has seen many such people in his trading days, and hence he insists on trusting the price. His point is straightforward – if the market is moving in your expected direction, you are right, and if it is moving in the opposite direction, you are wrong!
2. The human side of every person is the greatest enemy of the average investor or speculator
Recently one person approached me to seek my help to fix an issue with his trading style. His problem is quite simple and common among day traders.
He was losing money in intraday trading when he takes more trades in a day. I suggested him to reduce his number of trades to only 2 on any trading day. He said, “I know I will be on a profitable side if I restrict my trading activities to only 2 trades per day, but how do I achieve this?”
It might look silly to others. But it’s a big issue with his personality. He knows he can make money if the total number on any trading day is restricted to only 2, but he cannot follow it in the live market! It’s because his mind likes the action in the market, and it encourages him to take more trades.
I suggested him to close the trading terminal after 2 trades on any day. Besides, I also recommended shutting down the system if he faces difficulty to control the urge to see the charts.
But did you notice all of us will have similar issues which take away the majority of our profits? It may be revenge trading, forcing a trade when there is no opportunity, fear of missing opportunity (FOMO), greed to make quick money.
Until you accept and acknowledge this issue, it is not easy to taste success in your trading.
| Also Read: Top 10 Trading and Investment Books of All Time |
3. It was never my thinking that made the big money for me. It was always my sitting
It is one of the most frequently cited quotes in all the trading and investment circles. But there is a valid reason for it.
Do you know what the most challenging aspect of trading is?
Most of us think spotting the right entry point is challenging; a few people feel varying position sizes based on conviction of the trade is difficult.
But in my personal opinion, holding a profitable trade is the most challenging task in trading. When I say profitable trade, it’s not about small profits; it’s about riding your massive profits!
Unfortunately, many traders will not realize this aspect. If you recognize this, it will take your trading skills to a different level.
4. Wishful thinking must be banished
Wish or hope can trouble traders in many stages.
In the beginning, traders take a trade. They keep a stop-loss for the trade (either in the mind or system).
But whenever the price comes close to their stop-loss, they think it can still go in the expected direction, and hence they deepen the stop-loss with a few more points.
Then they start hoping or wishing that the price will not take their stop-loss. But you know the market is super-efficient, and it does its job.
The same wishful concept will trouble intermediate-level traders and experts as well.
Many of them take an entry at the wrong time, or they take a significant risk for one trade and immediately start hoping the price will move in their expected direction. Once again, these attempts will cost a lot.
Jesse has made the above statement in a stern tone to highlight the importance.
5. Do not trade every day of every year
Do you know that having no position in the wrong phase of the market is also a position? Because it saves some portions of your capital.
Many highly skilled intraday traders avoid trades on those days when they don’t see any good opportunity or when it’s too risky to plan a trade.
What is your aim for trading? Whether to make money in trading? Or to take a trade every day?
One might say, ‘Making money is my priority,’ but think whether your action supports it?
Do you know what decides your success in trading? It’s patience to wait until the price shows your entry criteria, which offers a good edge. You need to develop the ability to manage your Fear of Missing Out (FOMO) emotions in simple words.