Book Notes: Jesse Livermore's "How to Trade in Stocks"

9 Jan 2017

 

 

 

 

The idea is to get out fast when a trade goes against you. 

"Time element" is the most important factor in successful speculation

There are times when one should speculate, and just as surely there are times when one should not speculate. Money cannot consistently be made trading every day or every week during the year

The good speculators always wait and have patience, waiting for the market to confirm their judgment

Markets are never wrong - opinions often are

After forming an opinion with respect to a certain stock - do not be too anxious to get into it. Wait and watch the action of that stock for confirmation to buy

As long as a STOCK is acting RIGHT, and the MARKET is RIGHT, do NOT be HURRY to take a PROFIT.

One should NEVEL SELL a stock because it seems HIGH priced. NEVER BUY a stock because it has had a big decline.

Never be afraid of NORMAN movement, but be very fearful of AB-NORMAL movements, like a major change in personality

Human side of every person is the greatest enemy of the average investor or speculator

One cannot be successful by speculating every day or every week. In the interims you are letting the market shape itself for the next big movement 

When you are doing nothing, those speculators who feel they must trade day in and day out, are laying foundation for your next venture. You will reap benefits from their mistakes

"Behind the major movements is an irresistible force". That is ALL one needs to know. It is not good to be too curious about all the reasons behind price movements

Do NOT have an interest in too many stocks at one time

Another mistake I made was to permit myself to turn COMPLETELY bearish or bullish on the whole market. 

Too many speculators buy or sell impulsively, acquiring their entire line at almost 1 price. That is wrong and dangerous.

Buy small amount of shares as a "PROBE" to see if your judgment is correct. But each succeeding purchase must be at a "Higher Price" than the previous one. The reason for this procedure is that your trades have at all times shown you a profit. The fact that your trades DO show you a profit is proof you are RIGHT

Stocks do NOT move alone when they move. "Never look at only 1 stock, track 2. Why? Because stocks in the same group always move together"

Pivotal Points were the perfect psychological moment to make a trade:
- Reversal Pivotal Points mark a change in trend
- Continual Pivotal Points confirm the move is proceeding in the proper direction

He never wanted to buy at the lowest price or sell at the top. He wanted to buy/sell at the RIGHT time. This required him to have PATIENCE and WAIT for the perfect Pivotal Point trading situation to develop. 

Much of his success was in his ability to sit and wait patiently in CASH until the "perfect situation presented itself to him"

Reversal Pivotal Points are almost always accompanied by a HEAVY increase in VOLUME, a climax of BUYING, which is met with a barrage of SELLING - or vice versa. Increased volume is an essential element in understanding Pivotal Points. Reversal Pivotal Points usually came after long-term trending moves

Continual Pivotal Points as a consolidation where the stock pauses in its ascent. It is usually a natural reaction of the stock. It provides a confirmation and insurance that the stock will most likely to continue with its move. It gives a stock a chance to take a breath and consolidate often allowing the stock's ratio of earnings and sales to catch up to the price of the stock

A speculator has to be patient, because it takes time for a stock to run out its logical and natural course and form a proper Pivotal Point

I believe that often the LARGEST part of a stock movement occurs in the FINAL MARKUP PHASE

SPIKE - ONE DAY REVERSAL: I was very wary of price "spikes" accompanied by abnormally heavy volume of at least a 50% increase vs. the average. A One-Day-Reversal occurs where 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. You have to have the COURAGE to do the right thing and acknowledge this DANGER signal.

NEW HIGHS - were always good news, it meant that the stock had pushed through the overhead RESISTANCE and was very likely to advance.

JL was keenly aware of VOLUME. The question was it "ACCUMULATION" or "DISTRIBUTION".

Stocks were NEVER DISTRIBUTED on the way UP...they were distributed on the way DOWNDOWN. 

The people who bought at the HIGHS are now SELLING to get their money back - because they were scared - and are happy to get there money back. 

This is one of the reasons why Livermore bought stocks on NEW HIGH breakouts. Simply stated, there were most likely NO stock overhanging the market, waiting to be sold on the uptick, it was usually clear open air above the old high, once the stock broke out into clear skies.

Don't try and figure out WHY something is happening. Let the market give you the clues, the MOVEMENT of the stock is empirical evidence.

It is always better to SELL LARGE HOLDING into an ADVANCING STRONG MARKET when there is plenty of VOLUME.

Staying out of the action is always difficult for an active trader, it was essential at times to be out of the market, sitting, waiting in cash

In the long run, PATIENCE counts more than any other single element except knowledge. Never let yourself become discouraged by the fact that your securities are moving slowly. Good securities in time appreciate sufficiently to make it well worthwhile to have had patience

I absolutely believe that PRICE MOVEMENT PATTERNS are being REPEATED; they are RECURRING PATTERNS that appear over and over, with slight variations. This is because of stocks were being driven by HUMANS - and human nature never changes.

Keep a CASH reserve. The successful speculator must always have CASH in reserve.

There is a NEVER ENDING stream of OPPORTUNITIES in the stock market, and if you miss a good opportunity, wait a little while, be PATIENT, and another one will come along. DON'T REACH for a trade. 

The desire "always be in the game" is one of the speculator's greatest enemies in managing his money. There are times when playing the stock market that your money should be INACTIVE - WAITING on the sidelines in CASH - WAITING to come into play - in the stock market, TIME IS NOT MONEY, TIME IS TIME, and MONEY IS MONEY

Often money that is just sitting can latter be moved into the RIGHT situation at the RIGHT TIME and make a vast fortune. PATIENCE, NOT SPEED, is the KEY TO SUCCESS.

Stick with the WINNERS - as long as the stock is acting RIGHT - do not be in hurry to take a profit

One of my most important points in buying a stock was to try and buy as closely as possible to the Pivotal Points

One of the greatest mistakes that even experienced investors make is in BUYING CHEAP securities, just because they are selling at a LOW PRICE 

Losses are inevitable in the stock market and must be considered as part of your trading operating expenses

I was only interested in the ESSENTIAL MOVE, the IMPORTANT SWING in the price of the stock

When I said it was the "SITTING & WAITING" that was important I did not mean AFTER the stock was purchased, I meant BEFORE the stock was purchased 

My personal rule: make sure that you have placed as many factors in your favors as possible and never RUSH into any trade, take your time, there will always be another play

If it did not move as I believed it should move within what I considered a REASONABLE TIME, I'd then SELL out the position.

I believe in keeping my CAPITAL in CIRCULATION. If capital is frozen, traders miss many golden opportunities to trade the WINNERS. 

Stick to the strongest industries and pick out the strongest stocks in those industry groups

A good speculator has to get BEHIND the NEWS and SEE what was really going on. The reader has to beware of the source, motives and effect of what he is reading 

One of the things I liked best about my job was the SOLITUDE - I loved the INDIVIDUALITY, being the LONE WOLF - the SOLITUDE - everything that happened occurred as a result of my judgment.

The speculator must know the overall trend of the market before making a trade

I believe that the stock market always follows the LINE OF LEAST RESISTANCE until it meets with an at-first almost imperceptible force that slowly but inexorably stops its upward or downward movement. It is at these key PIVOTAL POINTS that the REAL MONEY is made

Just as the PANICS have always encouraged me to go LONG when things look the bleakest - conversely, when everything looks perfect and blissful it occurs to me that it may be time to go SHORT

Sometimes I have accumulated my line of stocks at what I believe to be the turning point in a great decline or at the crest of a mighty upward wave and I have carried this line for many months, even up to a year before I was proved correct. 

Because I understood that it requires time for general business to recover and for the earning power of these stocks to be reinstated so one must be PATIENT and PRUDENT in assembling their line of stocks  

Volume of trades was always of key interest to me

There are millions of MINDS involved in the stock market, these minds form DECISIONS based on the 2 main EMOTIONS: HOPE & FEAR - HOPE is often generated by GREED - FEAR is often generated by IGNORANCE

What this has always meant to me is that the key factor that drives the stock market is NOT INTELLIGENT ANALYSIS... It is HUMAN EMOTIONS

Everything that happens is a RESULT of the trader's JUDGMENT...the judgment was either correct or it wasn't

What all traders must beware of is in effect of kind of ARROGANCE, for when a stock moves against us we must decide that we were 'WRONG' and we MUST EXIT that trade instantly. It is GETTING OUT of those trades QUICKLY that is the KEY TO SUCCESS

Another TRAP the inexperienced trader must deal with is TRYING to find the EXACT BOTTOM & TOP of a major trading cycle.

I also was well aware that all stocks do NOT top out at the same time, BUT stocks in industry groups often top out at the same time. 

The principle of a Bull market is the AVAILABILITY of MONEY. I have always tracked the MONEY FLOW as well as I could

It is NOT what the million of people THINK about the market, or SAY about the market, it is what they DO about the market by their actual BUYING & SELLING 

It is far better to look objectively at the TAPE, for the tape will provide the ACTUAL FACTS as to how the public is reacting to the NEWS

The stock market always moves ahead of world events. The stock market is NOT operating in the PRESENT or reflecting the present; it is operating on what is yet to be the FUTURE

It is foolish to try and anticipate the movement of the market based on current economic news and current events...because these are already factored into the market. 

It is not that I ignored these facts, but these facts were not facts I could ever use to PREDICT the market.

The market always PRECEDES economic news, it does NOT REACT to economic news. The market lives and operates in FUTURE time

I try NEVER to PREDICT or ANTICIPATE the market, I only try to REACT to what the market is telling me by its behavior. Like a good detective, always look for PROOF of your facts and reconfirm them  

Without DISCIPLINE, a clear STRATEGY, and a concise PLAN, the speculator will fall into all the EMOTIONAL PITFALLS of the market and jump from one stock to another, hold a losing position too long, cut-out of a winner too soon for no reason other than FEAR of losing profit

The temptation is strong to take FAST PROFITS or cover your trade solely out of FEAR of losing the profit on a correction. Be sure you have a good clear REASON to enter a trade or to exit your position

In a market moving sideways, there is a great danger in trying to predict/anticipate WHEN and in WHAT DIRECTION the market will move. You must WAIT until the market or the stock breaks out of this sideways channel in either direction. 

 A successful trader must ONLY BET on the course of HIGHEST PROBABILITIES. Buy a SMALL POSITIONS, PROBE first, to test your judgment before you commit to a large position

The trader must react quickly to the UN-EXPECTABLE 

 

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