Updated: Dec 6, 2020
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 crash. 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 number of 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 to shut 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.
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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.
| Also Read - 6 Trading Mistakes Every Beginner Should Avoid
6. Successful trading is always an emotional battle for the speculator, not an intelligent battle
What factor determines your success in trading – intelligence or emotion control behavior? Many people believe only highly intelligent get success in trading, but that is not the case most of the time.
Emotion control behavior refers to your ability to perceive, understand, control, and express emotions.
Case-1: You have identified a good trading setup. Now the price is yet to show your trading setup. But waiting until it shows the right entry point falls under the emotional aspects of trading than the intelligent part. Isn’t it?
Case-2: You have taken a good trade, and it is showing outstanding profits after some time. But the price is still far from your exit point. When you see MTM at this stage, and itching will start in your hand to close the trade.
Do you agree? If yes, think whether it belongs to the intelligent or emotional aspects of trading.
Case-3: Suppose say, the market is waiting for something, and it’s giving a very narrow range of movements every day. You are not getting any entries as per your trading system. What should you do at this stage?
You should wait and have patience until you see your setups once again, right? You should know it’s the emotional aspects of trading.
7. Never buy a stock because it has had a big decline from its previous high
Don’t try to catch a falling knife!
Whenever a good stock shows a good fall, it looks like an attractive opportunity for many people. Because our mind perceives as a good deal is available at a reasonable discounted price, and this deal can generate more profits. But in reality, it’s not a good idea.
Let me explain.
Usain Bolt is one of the fastest and fittest athletes in the world. Assume he falls from a 2-floor building (just for explanation sake). Do you think he will be able to run immediately at the same speed?
Having this thought itself is foolish. Isn’t it?
Then what made you think a good stock which showed a deep fall would give good profits immediately? A deep fall indicates something terrible happened in the company, and the stock needs more time to recover (if it doesn’t fall further).
If you are buying a 52-week low or all-time-low stocks, then it is a sure-shot way to lose your hard-earned money.
8. Not taking the loss, that is what does damage to the pocketbook and to the soul
Have you noticed only 20% of your trading mistakes generates a loss of over 80% in your capital? You take a few revenge trades on one lousy day, and most of the trading capital is gone. It is the story of most beginners.
When a person opts for a trade, there can be only 4 possible outcomes:
A small win
A big win
A small loss
A big loss
If you can get rid of #4, then trust me, you already fall under a breakeven traders club!
From here, it’s all about learning how to ride your profits.
So, never ever take the mother of all the losses!
9. Patterns repeat, because human nature hasn’t changed for thousands of years
The markets are driven by just two emotions – “Fear” and “greed.”
When the overall market is fearful, it results in a downtrend.
When the overall market is greedy, it results in an uptrend.
When there is no clarity, it results in a sideways trend or range-bound market.
The current world might have witnessed rapid growth in technology, but any person cannot remove these two emotions from his mind.
Hence, one can see the same patterns again and again in trading.
10. Only enter a trade after the action of the market confirms your opinion and then enter promptly
The above statement looks like a simple statement at first sight.
However, it has a deeper meaning, especially for advanced traders whose position size is massive.
Jesse insists on taking a small position initially and only allocating more capital once the market confirms your theory. In this way, they can prevent more loss due to their big position size.
So, that’s it.
Great insights and powerful lessons learned from a great trader can help you immensely to improve your trading.
By the way, what is your favorite trading quote, and why? You can comment below!
If you want to know more about Jesse Livermore and his trading style, then you can check the book Reminiscences of a Stock Operator on Amazon (paid link).
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