Trading for a Living Read online

  Discussion: Clarity will come. Wait for it. Again, do not take trades simply because you hate missing out. Are you trading for excitement or profit?

  No Set Opinions

  “When a man makes his play in a commodity market he must not permit himself set opinions. He must have an open mind and flexibility. It is not wise to disregard the message of the tape, no matter what your opinion of crop conditions or of the probable demand may be.”

  Discussion: It is ironic that a trader must believe enough in his trade to put it on, but not enough to not change his mind. Conviction is good and necessary. Dogmatism isn’t.

  Buy High, Sell Higher

  “It is surprising how many experienced traders there are who look incredulous when I tell them that when I buy stocks for a rise I like to pay top prices and when I sell I must sell low or not at all. It would not be so difficult to make money if a trader always stuck to his speculative guns that is, waited for the line of least resistance to define itself and began buying only when the tape said up or selling only when it said down. He should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time. The same tape that said UP did not necessarily lie merely because it is now saying NOT YET.”

  Discussion: Buy low, sell high? Not for Livermore. He believed in entering strong trends, and then getting out when they are over.

  Trend Pyramiding Arithmetics

  “It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the profitable position of being able to cash in on the big bet.”

  Discussion: Livermore had a system for pyramiding. The initial entry is one fifth of his full position. As the trade develops and is profitable, he adds to the position.

  Can’t Tell til You Bet

  “I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people ask him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: ‘You can't tell till you bet.’”

  Discussion: Livermore is quoting an old trader he respected. The idea is that there is no way of knowing whether a particular trade will work out or not, until you put it on. Trading, as life, is about probabilities, not certainties.

  Reverse Your Psychology

  “I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation are usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not nearly so dangerous as when he is trading in stocks or commodities.

  The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day and you lose more than you should had you not listened to hope to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses.

  Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.”

  Discussion: To reverse one’s psychology is easier said than done. It is only possible with detachment. As long as trading is money focussed, most of us cannot help feeling swayed by greed and fear. The detached trader, however, can find it within himself to make objective decisions not based on emotions such as greed or fear.

  Can Make Money, but Cannot Beat the Market

  “I have been in the speculative game ever since I was fourteen. It is all I have ever done. I think I know what I am talking about. And the conclusion that I have reached after nearly thirty years of constant trading, both on a shoestring and with millions of dollars back of me, is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It's like the track. A man may beat a horse race, but he cannot beat horse racing.

  If I knew how to make these statements stronger or more emphatic I certainly would. It does not make any difference what anybody says to the contrary. I know I am right in saying these are incontrovertible statements.”

  Discussion: Sobering words on which Livermore puts extra emphasis. One can win on this trade or that trade, but the market as a whole cannot be beat. In other words, there is no single secret market key that persists and that one can use over and over to become wealthy.

  The Amateur vs. The Professional

  “A man can't spend years at one thing and not acquire a habitual attitude towards it quite unlike that of the average beginner. The difference distinguishes the professional from the amateur. It is the way a man looks at things that makes or loses money for him in the speculative markets. The public has the dilettante's point of view toward his own effort.The ego obtrudes itself unduly and the thinking therefore is not deep or exhaustive. The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to. A trader gets to play the game as the professional billiard player does that is, he looks far ahead instead of considering the particular shot before him. It gets to be an instinct to play for position.”

  Discussion: Livermore points out a number of crucial differences between an amateur and a professional. It is the defining characteristic of an amateur to think of individual trades in terms of money. A pro simply thinks of doing the right thing, win or lose.

  The Pleasure of Trading

  “I get my pleasure out of matching my brains against the brains of other traders, men whom I have never seen and never talked to and never advised to buy or sell and never expect to meet or know. When I make money I make it backing my own opinions. I don't sell them or capitalise them. If I made money in any other way I would imagine I had not earned it.”

  Discussion: A terrific description of trading as a pleasurable, intellectual activity of the highest order.

  Never Average Losers

  “It seems incredible that knowing the game as well as I did and with an experience of twelve or fourteen years of speculating in stocks and commodities I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. It was an utterly foolish play... Of all speculative blunders there are few greater than trying to average a losing game. My cotton deal proved it to the hilt a little later. Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.”

  Discussion: No matter how many years you have been trading, do not think you are beyond making mistakes, even serious ones. Choose humility over arrogance.

  On Tuition Fees

  “Fate does not always let you fix the tuition fee. She delivers the lesson and presents her own bill, knowing you have to pay it, no matter what the amount may be.”

  Discussion: Don’t be angry because you paid a higher tuition than expected. The amount you paid can serve as a reminder of the lessons learned.

  “I will never again (insert a mistake you made in the past here)”.

  On Making the Market ‘Pay’

  “What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait. The market must be nice to him at once if at all. He flatters himself that he is not asking more than to place an even-money bet. Because he is prepared to run quick say, stop his loss at two points when all he hopes to make is two points he hugs the fallacy that he is merely taking a fifty-fifty chance. Why, I've known men to lose thousands of dollars on such trades, particularly on purchases made at the height of a bull market just before a moderate reaction. It certainly is no way to trade.”

  Discussion: The market is not your whore. You cannot make it give you anything. The only things you control are your entries, exits, and how much you bet.

  Trading State of Mind

  “There I was, once more broke, which was bad, and dead wrong in my trading, which was a sight worse. I was sick, nervous, upset and unable to reason calmly. That is, I was in the frame of mind in which no speculator should be when he is trading.”

  Discussion: Don’t trade upset, don’t trade sick. Your body and mind need to be healthy and well.

  Know Thyself

  “A man must know himself thoroughly if he is going to make a good job out of trading in the speculative markets. To know what I was capable of in the line of folly was a long educational step. I sometimes think that no price is
too high for a speculator to pay to learn that which will keep him from getting the swelled head. A great many smashes by brilliant men can be traced directly to the swelled head, an expensive disease everywhere to everybody...”

  Discussion: If there is one ‘greatest commandment’ for a trader, it is to ‘know thyself’. Livermore did not consider any financial price too great to pay for deep self-knowledge.

  Possibilities

  “For three weeks my average profit was 150 per cent per week. From then on my trading would be on a steadily increasing scale.”

  Discussion: When you are in sync with the market, the possibilities are tremendous. Highest profits are made by day traders who know what they are doing. On the flip side, highest losses are posted by day traders who are either clueless or undisciplined. Beware.

  Experience Not Free

  “The loss of the money didn't bother me. Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.”

  Discussion: It is unreasonable to want valuable experiences for free. There is always a fee. So don’t expect to get it for nothing.

  This is a healthy way to view your blunders. You paid for learning what not to do.

  Moneyless Periods

  “The market flattened out. Things drifted from bad to worse. I not only lost all I had but got into debt again more heavily than ever. Those were long lean years, 1911, 1912, 1913 and 1914. There was no money to be made. The opportunity simply wasn't there and so I was worse off than ever.”

  Discussion: The market doesn’t always offer great opportunities. Livermore went years without any. Of course, most traders would like opportunities every day.... a rather unrealistic expectation.

  Take Responsibility

  “I convinced myself that whatever was wrong was wrong with me and not with the market. Now what could be the trouble with me? I asked myself that question in the same spirit in which I always study the various phases of my trading problems.”

  Discussion: You can choose to play a victim and blame everything outside yourself. Or, you can reclaim your power and take responsibility for your actions and results.

  Read Yourself, Not Just the Market

  “There is no need to feel anger over being human. I have come to feel that it is as necessary to know how to read myself as to know how to read the tape. I have studied and reckoned on my own reactions to given impulses or to the inevitable temptations of an active market, quite in the same mood and spirit as I have considered crop conditions or analysed reports of earnings.”

  Discussion: Acceptance and awareness are the two main qualities of a conscious trader.

  How much do you accept yourself?

  How aware are you of yourself?

  Save for a Rainy Day

  “I made up my mind I wasn't going to be strapped and uncomfortable and minus a stake ever again. Of course, after I married I put some money in trust for my wife. And after the boy came I put some in trust for him.

  The reason I did this was not alone the fear that the stock market might take it away from me, but because I knew that a man will spend anything he can lay his hands on. By doing what I did my wife and child are safe from me.

  More than one man I know has done the same thing, but has coaxed his wife to sign off when he needed the money, and he has lost it. But I have fixed it up so that no matter what I want or what my wife wants, that trust holds. It is absolutely safe from all attacks by either of us; safe from my market needs; safe even from a devoted wife's love. I'm taking no chances!”

  Discussion: Livermore set aside close to $5 million for his wife and children in trusts that could not be touched by him. In the end, Livermore lost every penny he had, but the money he set aside was safe and guaranteed a comfortable life for his family.

  Until It’s In Your Bank Account

  “No reasonable man objects to paying for his mistakes. There are no preferred creditors in mistake-making and no exceptions or exemptions. But I object to losing money when I am right. I do not mean, either, those deals that have cost me money because of sudden changes in the rules of some particular exchange. I have in mind certain hazards of speculation that from time to time remind a man that no profit should be counted safe until it is deposited in your bank to your credit.”

  Discussion: Who is your broker and how safe is your money there?

  Intuition

  “I admit that I do get irresistible impulses at times to do certain things in the market. It doesn't matter whether I am long or short of stocks. I must get out. I am uncomfortable until I do. I myself think that what happens is that I see a lot of warning-signals. Perhaps not a single one may be sufficiently clear or powerful to afford me a positive, definite reason for doing what I suddenly feel like doing. Probably that is all there is to what they call "ticker-sense" that old traders say James R. Keene had so strongly developed and other operators before him. Usually, I confess, the warning turns out to be not only sound but timed to the minute.”

  Discussion: “Ticker sense” or trading intuition is not a mystical power that is granted by God. It is developed through thousands of hours of observation.

  How to Think Like a Trader

  “The training of a stock trader is like a medical education. The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen. He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct and that depends upon the accuracy of his observation he ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 per cent of bull's-eyes. And then, as he gains in experience, he learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn't automatism. It is that he has diagnosed the case according to his observations of such cases during a period of many years; and, naturally, after he has diagnosed it, he can only treat it in the way that experience has taught him is the proper treatment. You can transmit knowledge that is, your particular collection of card-indexed facts but not your experience.”

  Discussion: A trader is a lot like a doctor diagnosing an illness. There is a need for a series of keen observations and deductions. Moreover, experience is counted in years, and cannot be substituted by anything else.

  Psychology Study Crucial

  “...there is profit in studying the human factors... the ease with which human beings believe what it pleases them to believe; and how they allow themselves - indeed, urge themselves - to be influenced by their cupidity or by the dollar-cost of the average man's carelessness. Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy, on the New York Stock Exchange as on the battlefield. I think the clearest summing up of the whole thing was expressed by Thomas F. Woodlock when he declared: "The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past."”