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"Jesse Livermore's Methods of Trading in Stocks" By Richard D Wyckoff Book Review

Updated: Nov 6, 2022

Richard Wyckoff brings us insights into the methods of trading by Jesse Livermore, a pioneer in day trading. We learn how Jesse Livermore traded in stocks long before 'Technical Analysis' was used as a trading tool.


Sit back for a great read of "Jesse Livermore's Methods of Trading in Stocks."



The Basics of Stock Selection

Livermore makes it a point to differentiate strong from weak stocks and industries to start with. Many investors fail to distinguish this and go for stocks that are cheaply priced.


He would also avoid the weak industries and filer strong stocks from the sectors that are strong at present.


He also points out that demand for products and commodities doesn't happen simultaneously. You would filter strong stocks from strong industries when they are high in demand.


This could be seasonal or based on historical trends. Look forward to what changes you are likely to see in a stock six months to one year down the line to invest. You are tying up your funds if you don't foresee a movement in a year.


Livermore's Essential to Success

Patience is one essential virtue you will see being discussed in stock market circles. Livermore felt patience counted more than any other element besides knowledge in the stock market.


He thought it was of utmost importance to investigate before investing in the right stocks. You pick the ones you will feel will go up rather than sit on hope.



Livermore always made it a point to prepare for the day early in the morning rather than the previous day. The morning update on various subjects and statistics have also factored in the previous day's news.


He avoids the front page news, which he calls news for public consumption. He rather looks for news about various commodities that are hidden or concealed by way of some sort.


A study of important factors of price change or curve not only lies in the direction of change. It also helps when you study them in equated intervals to notice changes and with the speed at which they happen.


The change and the speed with which they happen can forewarn you of something that's coming up when you identify a pattern.


Livermore strongly believes no one can succeed in the market unless he acquires knowledge of economics and thoroughly familiarizes himself with market conditions of all sorts.


He believes in studying information by himself rather than depending on manipulated views floating around. He puts it on a lighter note that there is no magic about success in the stock market. The only way you can succeed is to investigate before you invest.


Livermore feels that attaining spectacular and permanent success as a stock market operator requires one to devote his life to the business. A thorough knowledge of underlying conditions is indispensable. A certain period of the day should be devoted to studying.


Livermore's Workspace and Mindset

Livermore has practiced trading from his own private offices, where he is not disturbed by the demoralizing hubbub of a customer's room.


He did not even travel railroad trains or subways to avoid coming into contact with people and was eventually distracted by views that could interfere with his judgments. Playing a lone hand, he does his thinking, and he does not wish to have his mental processes interfered with morning, noon or night.


He feels one of the most indispensable qualifications to a trader in his position is the poise-that state of mental balance that enables him to regard any situation calmly and from an unbiased point of view, uninfluenced by hopes or fears. He has taken a course on psychology and not just read material on it.


Tips are something Jesse hates out of all other things. He feels they interfere with your decision-making. It also interferes with the way you decide things in a certain way based on how the situation changes. You can get the best results when your judgments have the least interference from inner and external forces.

Livermore set his office to have private office rooms for some of his assistants and himself. There is a boardroom for discussions with complete details of stocks. They don't just have the stock's open, high, low, and close price of the stock as practiced by other brokerage offices.


The details are compiled in a manner that swings in stocks, the extent of its rallies and reactions, as well as its relative activity, is displayed. Even the positioning of tickers in his office leaves us in awe. He uses tall tickers, for they keep him on his feet in an erect position so that he can breathe properly and his circulation will be unimpeded.


How Jesse Interprets the News?

Livermore does not accept statements at face value that are given in the public domain. He believed in interpreting the real situation disclosed or the real purpose behind the publication of the news.


He understood that the market is made up of and is a reflection of several minds put together. Some of these minds were more powerful than others, and there was every possibility that they could influence public sentiment.


The tape reflects the operations and motives of large operators and insiders. The big money is in the long swings.


How Livermore Reads the Tape?

Livermore picks up the tape at the opening of the market for confirmation or contradiction of his previously formed opinion.


To conclude his decision-making, he diligently looks for several aspects that can impact the price. Mind you, there are so many things Livermore looks at, it will leave you dumbfounded. Below are some of the things he looks at, just to name a few of them here.

  1. Whether opening prices are above or below the previous closing

  2. Which stocks are showing strength or weakness

  3. The power of the strongest or weakest groups

  4. Nature of manipulation

  5. Whether there is evidence of insider operating



He carefully observes the development of swings running into several points and occupying from a few weeks to a couple of months.


As dips and rallies form the vast stream known as the stock market which. though frequently altering its course, follows the line of least resistance until its journey upward or downward is ended.


Livermore feels judging the main turning points in the swings of the long is the most important thing. He looks for more frequent reactions at important turning points to liquidate largely or most of the positions.


He does not wait for the actual top to be formed because they cannot be formed by all the stocks at the same time.


Livermore, His Commitments, and Risk

Livermore knew if an operator could trade in stocks without danger of a loss, there would be no object in endeavoring to ascertain the profit's size.


The public reverses one of the first principles in successful stock trading, which is to cut your losses and let your profits run. He worked on slender margins in his early years in bucket shops. When these were wiped out, he knew he had documentary evidence that his judgment was wrong.


This experience drilled into him both the advantage and the necessity of cutting losses short. It taught him a lesson he never forgot. The relation between the amount of his theoretical risk and the size of his minimum anticipated profit is a very interesting point and one which most of the public seems to overlook.


He makes it a point to enter a trade only when he sees a probable ten-point profit. He had larger profit lines, but the point was to look at a bare minimum probable profit to limit risk to a smaller number.


He enters into a trade and waits for an important swing. If it does not come by then, he concludes he made an error. The ratio of profit measured in points is, therefore, greater than ten to three or ten to five.


Livermore says, "When I have to depend on hope in a trade, I get out because it will only bother me in my trading, and I cannot afford to be on anything but live ones." He strongly believes in the following when trading stocks.

  1. Stay away from drifting stocks

  2. Capital turnover is very critical

  3. Always be ready for opportunities

  4. Trade in market leaders that have wild swings

  5. Trade action stocks

  6. Choose pyramiding at higher prices than average down at lower prices


Conclusion

It is only right to conclude that there is no magic about success. You succeed depending on the investment you made to acquire fundamental knowledge of economics and conditions of every sort.


Livermore believed in making his judgments rather than relying on views that were floated, sometimes with vested interests. This is something that every trader and investor should ponder upon.

Get your copy of the book for more detailed insights into Jesse Livermore's method of trading in stocks.


(Amazon Paid Link)


Guest Post - Written by Mr. Lal Bajaj, Bangalore


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