Lessons From The Great: Jesse Livermore Teaches You How to Trade

In Summary:

  • Jesse Livermore, known as the Boy Plunger, is a legendary trader on Wall Street
  • He made $100 million during the crash of 1929 and his trading rules are still practiced by traders

Who Was Jesse Livermore?

Jesse Lauriston Livermore, one of the most famous speculators on Wall Street, is known for having made several fortunes by trading in the financial markets.

Born on July 26, 1877, he made his first trade when he was 15 years old. What followed was a rollercoaster 45-year career on Wall Street. This was enough time to experience the ups and downs of the market. And plenty of time to make mistakes, learn from them, and reap enormous profits.

His methods were mostly based on technical analysis: a skill he learned by observing the charts and looking for patterns. He believed that technical trading was all he needed to open and close positions. “Wall Street never changes,” he said, “because human beings never change.”

In this light, he saw in the charts recurring mathematical models and price patterns. In his eyes, they reflected human behavior as greed, fear, ignorance, and hope. After being broke at least four times, and making everything back, he tragically ended his life by suicide in 1940.

Who is Jesse Livermore

How Livermore Became The Boy Plunger

One of Livermore’s best trades, the one on the day of the great market crash of 1929, brought him $100 million. Led by a passion for taking chances, he would sell short the US stock market, earning himself the nickname “The Boy Plunger.” During the year 1929, everyone, including respected economist Irving Fisher, was saying the Dow Jones index will continue to rise “permanently.” And indeed, it has been doing so for the past eight years straight for a total gain of over 500% – a rise never seen before.

While everyone was bullish on stocks, and analysts were projecting even more growth, Livermore would be piling more cash into his short position. For four weeks, he would invest more than $450 million, betting the US stock market will crash. What followed was several days of wild fluctuations for no apparent reason. Then, in just three days, stocks lost over 30% of their valuation.

The Great Crash of 1929

The Great Crash Of 1929

The first day of the series, October 24, pushed the Dow lower by 11% right at the opening bell. While chaos swept Wall Street, Livermore was unfazed. The second day, October 28, wiped another 13%, followed by the third day, October 29, when the Dow suffered a further 12% loss.

Over the course of a week, Wall Street had lost $30 billion. Jesse Livermore, however, had a field day. His bet of $450 million had returned a handsome profit of $100 million, making him one of the richest people on earth.

By today’s standards, a 30% drop in US stocks would be equal to roughly $15 trillion. Jesse Livermore’s profit, in today’s inflation-adjusted rate, would be equal to over $1.6 billion.

What Was Livermore’s Trading Strategy?

As we mentioned above, Livermore was not a fundamentalist, but a true technical trader. His strategy, therefore, was based on identifying trends and finding opportunities in chart patterns. Through careful years-long observation of price movements, he learned to recognize repetitive patterns. In other words, he discovered that stocks, currencies, and commodities move in cycles. And that these cycles can be predicted.

By developing a set of tools like chart indicators and price analysis, he would bet aggressively with uncanny reliability. More importantly, his trading strategy could be applied to any market, in any time frame, from 5-min charts to monthly charts. For Livermore, preparation was essential. He would enter the financial markets only when he was both psychologically and physically ready for a day of trading. Let’s take a detailed look at what was inside Jesse Livermore’s trading strategy.

Livermore's Rules of Trading

Jesse Livermore’s best trades would happen only when he was strictly following his trading strategy. “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this,” Livermore said, “it never was my thinking that made the big money for me. It always was my sitting.” In other words, patience pays off.

Now let’s dig into his trading rules and see what lessons he has for today’s traders.

  • Determine the direction of the trend and go with it. Livermore called this rule the Line of Least Resistance. In detail, go with the evidence the market gives you at the time, instead of trying to predict what will happen next.
  • Identify trend changes. This is helpful in two specific ways. First, if you have a winning position and have been riding a trend, you need to know when to get out. Identifying trend changes will help you do just that: exit your position. And second, this will also help you see where a new trend may form and get on it.
  • Align your trade to as many factors as possible. This will give you the highest level of security. Once all factors are in your favor, that’s when you need to have the most conviction.
  • Know when to bet and when to fold. No one could beat the market constantly. This could also mean that the more you trade, the more chances you have to be wrong. Livermore would wait for the perfect trade and then go in.
  • Learn from your mistakes and use them to grow. The truth is lots of trades you place will lead to losses. It is crucial, in that sense, to learn from your mistakes and not repeat them. Livermore would only lose when he was trading out of his trading strategy, i.e. not following the rules.
  • Profits take care of themselves. As long as a stock is acting right, do not be in a hurry to take profit. Let profits run, because if you are right, you would cut your chances to win big. As long as you see no signal to sell, let your trade stay in the market.
  • Losses never take care of themselves. In trading, it is absolutely necessary to do anything to prevent losses. To this end, Livermore would use tight stop-loss orders which would sell his investment if it turned against him. “A loss never bothers me after I take it. I forget it overnight,” he said. “But being wrong – not taking the loss – that is what does damage to the pocketbook and to the soul.”
  • Do not be overexposed. Having too many trades at one time can be detrimental to both your account and your mental sharpness. You need to be present in every trade, which would be a lot easier if you had a handful of trades, rather than dozens.

Can You Apply Livermore’s Trading Today In Markets?

It is absolutely possible to apply Jesse Livermore’s trading rules to the markets today. Moreover, as he said himself:

“There is nothing new in Wall Street. There can’t be, because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”For today’s traders, it is highly important to follow a strategy when trading the market. Given all the information streams and media outlets, there is a constant buzz that may cloud your judgment. What Livermore did in such situations was to isolate himself and trade in silence.

“I wanted to be away from the Wall Street atmosphere, out of earshot of any tips. I also wanted to gain more secrecy in my operations and more security, so that no one could know my trades. Sometimes I used over fifty brokers to keep my trades secret.”

Summary

Jesse Livermore is a trading legend and one of the greatest speculators ever known. His legacy has inspired thousands of traders and investors and a book considered “the trader’s bible.” Under the pseudonym Larry Livingston, he was the real protagonist in Edwin Lefevre’s best-selling book “Reminiscences of a Stock Operator.”

This book explains his personal life and trading career full of volatility, mood swings and relentless pursuit of excellence. At his core, Livermore was a technical trader who interpreted charts and to some extent discredited news, tips, and rumors. More importantly, he was willing to use his own money, even bet his entire fortunes, to prove his strategy worked. He remains in history as an example of a fearless, but not a reckless trader. His approach to the markets has stayed with generations of traders, while his mistakes – stepping stones to success. As to Lefevre’s book, it is a mandatory read for many new traders looking to join the hedge fund industry.

Like Jesse Livermore, other historical traders have a lot to teach us all about the simplest and also the most sophisticated ways to invest and trade. WD Gann and George Soros are two such names that certainly deserve your attention and are also part of our Lessons From the Great section.

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