Following are some very valuable trading lessons from Jesse Livermore, which if followed properly, can create signicant trading profits.
Take your losses quickly and don’t brood about them. Try to learn from them, but mistakes are as inevitable as death. And only make a big move, a real big plunge, when the majority of factors are in your favor.
I think it takes three things. Timing. When to get in the market and when to get out, or when to hold and when to fold. It takes money management. You can’t ever lose your stake, or the entire game is over. And it takes emotional stability. Yes; maybe most important, it takes the ability to control your emotions when you’re in the play. That’s it.
There is nothing unique about the crash of ’29. It is something that happens about every 20 to 30 years, because that is the length of the financial memory. It is about the length of time needed for a new set of suckers to come in and imagine that they have a new and wonderful fix on the future.
A danger signal, often a signal to exit a trade, a signal that made Livermore sit up and take notice, was the one-day reversal. This is a stock movement that often happens at the end of a long-term move. A one-day reversal occurs when the high of the day is higher than the high of the previous day, but the close of the day is below the close of the previous day and the volume of the current day is higher than the volume of the previous day.
Always evaluate and appraise general conditions first, and determine the line of least resistance. Is it an upward-trending market or a downward-trending market? Or is it consolidating-moving sideways, trying to make up its mind? If the overall trend of the market is not in your favor, you are playing at an extreme disadvantage. Go with the flow, bend with the trend, do not sail into a gale.
To anticipate the market is to gamble; to be patient and react when the market gives the signal is to trade.
Wait until a bottom has been firmly established and tested before going in and buying stock.
Nothing ever changes in the market. The only things that change are the players, the pockets, and the memories. The new players have no memory of the previous cycles, because they have not experienced them.
Confine your studies of stock market movements to the prominent stocks of the day, the leaders. It is where the action is. If you cannot make money out of the leading stocks, you are not going to make money out of the stock market. Second, this will also keep your trading universe small and controllable, so you can focus and trade the stocks with the greatest potential. Don’t let greed drive your moves by trying to catch the exact top and the exact bottom.
You will win when all the factors are in your favor, when you are patient and wait for all the ducks to line up in a row. That leads to the second conclusion, that no one could or should trade the market all the time. There were times when a trader should be out of the market, in cash, waiting.