Jesse Livermore’s 7 Trading Lessons




(I must give credit to the Lefevre book mentioned above, as well as Jesse Livermore: World’s Greatest Stock Trader by Richard Smitten, for the following ideas.)

Lesson Number One: Cut your losses quickly.

Nowhere is this rule more apparent than in the modern-day crash our markets experienced in the fall of 2008. For those market participants who “bought, held, and hoped,” the gut-wrenching drop left them paralyzed, disillusioned, and angry at the market. They felt like they had no control and no choice as the losses spiraled down the rabbit hole. The primary culprits of this death trap are hopeful thinking and fearful paranoia.

As a market slides lower, a trader will rationalize his losing position by either doubling down (buying more at these now-cheaper prices) or at the very least, holding on because “there’s just no way this market can go lower.” If merely this one simple rule was implemented to “cut your losses,” the vast majority of traders would be light years ahead of the crowd.

As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified. Trading without an exit plan is like driving a car without insurance. You might go years without a major crash, but when the crash occurs (and it will), you want to be protected from a major financial disaster.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns. He admitted that his biggest mistake was holding on to a position as it ran against him, and then selling out when the pain got too great.

Livermore learned to remedy this dilemma by taking on a small line at first, and only adding when he was proven correct. There are several decent ways to buy more in a winning position (pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry) but the take home is to buy in the direction of your winning trade — and never when it goes against you.

Lesson Number Three: Watch leading stocks for the best action.

One hundred years, ago Mr. Livermore didn’t have near as many issues to track, yet he made it his mission to follow the market makers and big players when their money flooded into a specific stock or commodity. Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.

Today, traders have the ability to track sectors, ETFs, and the footprints of the best mutual-fund managers to ascertain where the heavy hitters are moving their capital. Superstars such as Google (GOOG), Goldman Sachs (GS), and General Electric (GE) can also show their hand when looking at the bigger picture of overall market health. Traders ignore these tells at their own peril.


Perhaps the most famous quote attributed to Livermore is, “It never was my thinking that made the big money for me. It always was my sitting.” Traders are wired to be “doing something,” and this can cause churning, over-trading, getting out of positions too soon, and making your broker the wealthy one. The famous Turtle Traders were trend traders who made few trades and had learned the importance of staying in a winning trade.

For today’s traders, there are multiple variations to keep you in a trade. It’s not so important which method you implement, but that you do recognize when to hold a winner for maximum potential, and when a trend has changed character and it’s time to ring the register.

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position. Even day and swing traders will benefit from letting a partial position play out when all indicators hint that more upside might be in the cards. Always remember this rule is letting a profitable position run, but it’s not a license to bury one’s head on a losing position.

Lesson Number Five: Buy all-time new highs.

Traders love a bargain — trying to bottom feed, buying in on limit orders instead of market to save a penny, buying on dips, and various other trickery to try and catch the swing low of a trade. These same traders can also recount when saving a penny cost them a dollar, buying that dip was only the start of a long downtrend, and buying new lows only led to lower prices and more misery.

Livermore understood that when a trader buys new highs, that for that moment in time, the only holders are happy holders. Blue skies are above and there are no longer-term investors waiting to sell once they get back to break even. The psychological merits of buying all-time or 52-week highs are immense and shouldn’t be discounted as a part of your overall strategy.

Lesson Number Six: Use pivot points to determine trends.


Lesson Number Seven: Control your emotions.

Easier said than done in everyday life, let alone in one’s trading account, controlling those emotional demons that lurk under the surface may be the most difficult task for traders (beginners and seasoned alike) to master. You finally hit a quick 10-point winner, and the euphoria and pride rush in to give you a virtual high-five. You hold on past your mental stop-loss and watch your equity bleed like a leaking faucet, which in turn causes you to seethe with frustration, whether on the outside or internally. If there’s one absolute rule, it’s that every trader has to confront the role they allow their emotions to play in their trading life.

Livermore chronicles the times when he was trading for revenge, to get back his lost stake, or merely to prove he was right. By his own admission, these were terrible reasons to put on a trade, and he was at his finest when he blocked out the noise of his day and just watched the tape.


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