Lessons from the Pros

Education Resource

Happy Birthday, Jesse Livermore!

Last week was the 136th birthday of legendary stock speculator Jesse Livermore, born on July 26, 1877. Livermore began working in a Paine Webber brokerage office at age 14 and executed his first profitable trade at age 15. He made his first million by shorting the market in 1907. In 1922 he gave a series of interviews to Edwin Lefevre which would be collected in the classic Reminiscences of a Stock Operator.

Many of Livermore’s observations will be familiar to OTA traders because they follow the same principles taught in our classes. Here are a few of our favorites:

On trying to outsmart the market:

“The unsuccessful investor is best friends with hope, and hope skips along life’s path hand in hand with greed when it comes to the stock market. Once a stock trade is entered, hope springs to life. It is human nature to be positive, to hope for the best. Hope is an important survival technique. But hope, like its stock market cousin’s ignorance, greed, and fear, distorts reason. See the stock market only deals in facts, in reality, in reason, and the stock market is never wrong.”

On the importance of having a trading plan:

“I believe that having the discipline to follow your rules is essential. Without specific, clear, and tested rules, speculators do not have any real chance of success. Why? Because speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan. Speculators without a single clear plan can only act and react, act and react, to the slings and arrows of stock market misfortune, until they are defeated.”

On seeing price patterns in the markets:

“The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you can familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements…. I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations.”

On setting stops:

“When you make a trade, you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade.”

Livermore reached the high point in 1929 when he made over $100 million by shorting the market during the Great Crash. He later lost his fortune in trading reversals, but his family and their lavish lifestyle were protected by annuities and trusts Livermore had set up as a precaution. In later years Livermore suffered from depression; in 1940 he took his own life and left a suicide note describing his life as a “failure”.



DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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