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  If It Doesn’t Act Right, Don’t Touch It

  “There is what I call the behavior of a stock, actions that enable you to judge whether or not it is going to proceed in accordance with the precedents that your observation has noted. If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit. It is a very old thing, this of noting the behavior of a stock and studying its past performances.”

  Discussion: It’s about clarity. Don’t make trades without strong convictions. ‘Hoping’ is a losing proposition.

  Never take trades because you fear missing out. If you miss out, remember that there is another move coming soon.

  Have a Schedule

  “The game of beating the market exclusively interested me from ten to three every day, and after three, the game of living my life. Don't misunderstand me. I never allowed pleasure to interfere with business. When I lost it was because I was wrong and not because I was suffering from dissipation or excesses. There never were any shattered nerves or rum-shaken limbs to spoil my game. I couldn't afford anything that kept me from feeling physically and mentally fit. Even now I am usually in bed by ten. As a young man I never kept late hours, because I could not do business properly on insufficient sleep. I was doing better than breaking even and that is why I didn't think there was any need to deprive myself of the good things of life. The market was always there to supply them. I was acquiring the confidence that comes to a man from a professionally dispassionate attitude toward his own method of providing bread and butter for himself.”

  Discussion: Livermore had a schedule and stuck to it. Trading is a demanding job. Take care of your health. Feeling sick or tired while trading is not a good idea.

  Make Use of Fundamentals

  “I had to go further back than an hour in my studies of the market which was something I never would have learned to do in the biggest bucket shop in the world. I interested myself in trade reports and railroad earnings and financial and commercial statistics. Of course I loved to trade heavily and they called me the Boy Plunger; but I also liked to study the moves. I never thought that anything was irksome if it helped me to trade more intelligently. Before I can solve a problem I must state it to myself. When I think I have found the solution I must prove I am right. I know of only one way to prove it; and that is, with my own money.”

  Discussion: It is a myth that Jesse Livermore was a purely technical trader. As is evident, Livermore supplemented his trading with fundamental analysis.

  Don’t Enter on Pullbacks

  “I made up my mind to be wise and play carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I sitting there with my four-point profit safe in my conservative pocket. They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market.”

  Discussion: Earlier in his career, after entering on breakouts, Livermore would take some quick profits, and then waited on pullbacks to re-enter. That cost him money, because he waited ‘for a reaction that never came’.

  Essentially, Livermore advises entering on breakouts, and then holding until the trend is over. Taking quick profits after a breakout could mean that one misses the big move, as there may not be good places to re-enter the market. (Every trader knows the feeling when the market takes off without pausing, but without him.)

  On Grades of Suckers

  “The beginner knows nothing, and everybody, including himself, knows it. But the next, or second, grade thinks he knows a great deal and makes others feel that way too. He is the experienced sucker, who has studied not the market itself but a few remarks about the market made by a still higher grade of suckers. The second-grade sucker knows how to keep from losing his money in some of the ways that get the raw beginner. It is this semisucker rather than the 100 per cent article who is the real all-the-year-round support of the commission houses. He lasts about three and a half years on an average, as compared with a single season of from three to thirty weeks, which is the usual Wall Street life of a first offender. It is naturally the semisucker who is always quoting the famous trading aphorisms and the various rules of the game. He knows all the don'ts that ever fell from the oracular lips of the old stagers excepting the principal one, which is: Don't be a sucker!”

  Discussion: Later on, Livermore defines the semisucker as someone who ‘buys on declines’. In other words, the semisucker is a counter-trend trader.

  Sit Tight

  “And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.”

  Discussion: What does Livermore mean by sitting tight?

  In the context, he means letting the profits run, resisting the temptation to take small profits when you are in a strong trend. As every trader knows, this is difficult to do and requires a high degree of maturity and experience.

  The Role of Confidence

  “Without faith in his own judgment no man can go very far in this game. That is about all I have learned, to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary. I have been short one hundred thousand shares and I have seen a big rally coming. I have figured and figured correctly that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits. And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it the certainty of a big killing. It is the big swing that makes the big money for you.”

  Discussion: There is a number of lessons here, but they could be summarized as: “Go for the big moves with confidence”.

  Make a List of Don’ts

  “Every time I found the reason for a loss or the why and how of another mistake, I added a brand-new DON’T to my schedule of assets.”

  Discussion: Stick your list of DON’Ts to your screen. It will be a good reminder as you wait for a your trade setup to materialize.

  Never Take Tips

  “I found when I got my reports that Ed Harding's kindly intentioned interference cost me forty thousand dollars. A low price for a man to pay for not having the courage of his own convictions! It was a cheap lesson.”

  Discussion: Out of character, Livermore acted on a tip he received, instead of having the courage to follow his own convictions. $40,000 was a lot more money back in those days.

  Pyramid Winners

  “People don't seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at
a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don't buy long stock on a scale down, I buy on a scale up.”

  Discussion: Don’t average your losers. Instead, pyramid your winners.

  How to Pyramid

  “...in starting a movement it is unwise to take on your full line unless you are convinced that conditions are exactly right. Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit. Wait and watch. That is where your tape reading comes in to enable you to decide as to the proper time for beginning. Much depends upon beginning at exactly the right time. It took me years to realize the importance of this. It also cost me some hundreds of thousands of dollars. I don't mean to be understood as advising persistent pyramiding. A man can pyramid and make big money that he couldn't make if he didn't pyramid, of course.

  But what I meant to say was this: Suppose a man's line is five hundred shares of stock. I say that he ought not to buy it all at once ; not if he is speculating. If he is merely gambling the only advice I have to give him is, don't! Suppose he buys his first hundred, and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is in wrong; at least temporarily."

  Discussion: Livermore outlines his mature method for trading his full position. The conditions have to be exactly right. If the first trade doesn’t show profit, it is wrong and is closed. If the trade is working out and showing profit, it is added on.

  Mind

  “To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.”

  Discussion: Anger gets you nowhere. The market does what it does. Are you in control of your trading, or is the market in control of you?

  The Thing To Do

  “Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn't it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”

  Discussion: Sometimes the simplest lessons are the hardest to learn, and they take a long time to sink in.

  Trader’s Evolution

  “The moment I ceased to be satisfied with merely studying the tape I ceased to concern myself exclusively with the daily fluctuations in specific stocks, and when that happened I simply had to study the game from a different angle. I worked back from the quotation to first principles; from price fluctuations to basic conditions.”

  Discussion: This represents Livermore’s own maturation as a trader, moving beyond simple price fluctuations to creating a more complex picture of the market state in his mind. By ‘basic conditions’, Livermore means context.

  Is the market trending? Is it about to? Is it stuck in a range? How is the volatility?... and so on.

  On Mistakes

  “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.”

  Discussion: Everybody makes mistakes, so nobody owns the world in a month. The point is about growing wiser with each mistake.

  Do Your Own Thinking

  “I have always played a lone hand. I began that way in the bucket shops and have kept it up. It is the way my mind works. I have to do my own seeing and my own thinking.”

  Discussion: Do not depend on anyone else for your trading signals. Do your own thinking. It’s your money, and you alone are responsible for the results.

  Buy All Time Highs

  “It was an old trading theory of mine that when a stock crosses 100 or 200 or 300 for the first time the price does not stop at the even figure but goes a good deal higher, so that if you buy it as soon as it crosses the line it is almost certain to show you a profit. Timid people don't like to buy a stock at a new high record. But I had the history of such movements to guide me.”

  Discussion: Look at the chart of Google when it was at $100, $200, or $300. Too high to buy, right? Not in a strong trend. That’s Livermore’s point. It is never too high to buy in very strong trends.

  Big Money

  “The way to make big money is to be right at exactly the right time. In this business a man has to think of both theory and practice. A speculator must not be merely a student, he must be both a student and a speculator.”

  Discussion: A truism worth pondering.

  The Greatest Danger

  “A loss never bothers me after I take it. I forget it overnight. But being wrong not taking the loss that is what does the damage to the pocketbook and to the soul.”

  Discussion: Have you ever cancelled your stop loss order or moved it? Likely, it ended up being a disaster.

  But Livermore notes that it isn’t the financial damage that is the worst, but the damage to your confidence, well-being, and your ‘soul’.

  If you traumatized yourself in the past, the only way to recover yourself is by doing the right thing the next time.

  Self-Sabotage

  “The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment. When you associate certain mistakes with a licking, you do not hanker for a second dose, and, of course, all stock-market mistakes wound you in two tender spots your pocketbook and your vanity. But I will tell you something curious : A stock speculator sometimes makes mistakes and knows that he is making them. And after he makes them he will ask himself why he made them; and after thinking over it cold-bloodedly a long time after the pain of punishment is over he may learn how he came to make them, and when, and at what particular point of his trade; but not why. And then he simply calls himself names and lets it go at that.

  Of course, if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.”

  Discussion: Do you ever catch yourself making a mistake and knowing it? Such a pattern is called self-sabotage. If there ever was a holy grail of trading psychology, then eliminating self-sabotage is it. It goes back to ‘knowing thyself’. Understand the reasons why you act the way you do.

  Sell Down to the Sleeping Point

  “You remember Dickson G. Watts' story about the man who was so nervous that a friend asked him what was the matter.

  ‘I can't sleep,’ answered the nervous one.

  ‘Why not?’ asked the friend.

  ‘I am carrying so much cotton that I can't sleep thinking about it. It is wearing me out. What can I do?’

  ‘Sell down to the sleeping point,’ answered the friend.”

  Discussion: You have to trade in a way that is comfortable to you. If you are losing your sleep or feeling anxious, reduce your position... or perhaps adjust the way you trade.

  The Average Speculator

  “...people never take the trouble to ask questions, leave alone seeking answers. The average American is from Missouri everywhere and at all times except when he goes to the brokers' offices and looks at the tape, whether it is stocks or commodities. The one game of all games that really requires study before making a play is the one he goes into without his usual highly intelligent preliminary and precautionary doubts. He will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile.”

  Discussion: Trading is not to be entered casually. It requires a tremendous amount of effort and focus. Success does not come haphazardly.

  Wait for Clarity

  “...tape reading is not so complicated as it appears. Of course you need experience. But it is even more important to keep certain fundamentals in mind. To read the tape is not to
have your fortune told. The tape does not tell you how much you will surely be worth next Thursday at 1:35 p.m. The object of reading the tape is to ascertain, first, how and, next, when to trade that is, whether it is wiser to buy than to sell. It works exactly the same for stocks as for cotton or wheat or corn or oats.

  You watch the market that is, the course of prices as recorded by the tape with one object: to determine the direction that is, the price tendency. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.

  Nobody should be puzzled as to whether a market is a bull or a bear market after it fairly starts. The trend is evident to a man who has an open mind and reasonably clear sight, for it is never wise for a speculator to fit his facts to his theories. Such a man will, or ought to, know whether it is a bull or a bear market, and if he knows that he knows whether to buy or to sell. It is therefore at the very inception of the movement that a man needs to know whether to buy or to sell.”