Trading Tips from Legendary Millionaire Trader: Jesse Livermore

It’s 1929 and over the last 8 years the Dow average has seen an epic rise. Everyone wants to own stock, and loose leverage requirements allow it. Stock loans reach $8.5 billion; more money than was in U.S. circulation.  In September stocks start to flatten out, then decline. In spite of many people telling him it was foolish to short this raging bull market, Jesse Livermore begins to short stock, and continues to do so as the Great Stock Market Crash of 1929 unfolds. He profited to the tune of more than $100 million dollars…about $1.384 billion in 2014 dollars, according to the Bureau of Labor Statistics. This makes Jesse one of the most iconic legendary millionaire traders in history.
This wasn’t a hedge fund manager or someone who was trading other people’s money. Jesse worked on his own, and traded his own capital. Here are some trading tips Jesse Livermore provides in his book How to Trade in Stocks (1940), and the classic book which describes his earlier trading career: Reminiscences of  Stock Operator (1923).
Trading Tips from Legendary Millionaire Trader

“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.”

While markets and trading technologies are constantly evolving and changing, the same patterns and emotional highs and lows continue to play out, causing some to get rich and others to lose. While most traders lose, and Jesse Livermore also had losing periods (discussed later), he established a trading system and tried to followed it. This allowed him to capture massive gains when the market trended in his direction, and also kept his risk limited if he was wrong. It was only when he deviated from this plan that it cost him money.

Here are some summary details about Jesse’s trading system:

“Only buy strong stocks in a bull market, and only short weak stocks in a bear market.”

• Jesse Livermore was a trend trader. He focused on finding and buying the strongest stocks in a bull market, and shorting the weakest stocks in a bear market.
• Don’t focus on too many stocks. Only focus on the strongest and/or weakest, as these are the ones moving the most and offering the most potential currently. Follow to many stocks and it’s hard to track and trade them effectively.

“It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!”

• If there’s no clear signal to get in, don’t trade. Jesse traded at what he called “pivotal points,” which would be equivalent to a significant prior level in the stock. Until the price moved through that level, triggering a trade, he “sat tight.” This helped avoid drawing down capital when conditions weren’t ideal for trading.

“A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does damage to the pocketbook and the soul.”

• Jesse used stop loss orders to help control risk. He made trades based on his analysis and trade setups, but no one is right all the time. Jesse Livermore set a stop loss at a price which would get him out of the trade if the trade wasn’t working out. Sometimes that would mean getting stop out at a loss, only re-enter the position again when another trade setup came along. Adhering to the original plan of the trade is very important…take the loss when your trading plan dictates you should.

“When I am bearish and I [short] a stock, each sale must be at a lower level than the previous one. When I am buying, the reverse is true.”

“Each succeeding purchase must be at a higher price than the previous one.”

• Livermore increased his position size in winning trades–called pyramiding. When a trade continued to move in his direction, this resulted in massive gains. Learn more about the pros and cons of pyramiding: How to Pyramid Your Trades.

Great numbers of people will buy a stock, let us say at 50, and two or three days later if they can buy it at 47 they are seized with the urge to average down by buying another hundred shares, making a price of 48.5 on all.

Having bought at 50 and being concerned over a three-point loss on a hundred shares, what rhyme or reason is there in adding another hundred shares and having the worry double when the price hits 44?

• Jesse didn’t add to losing positions–called averaging down. Don’t throw good money after bad. To see why, read Risk Management Mistakes that Ruin Traders.

“The professional concerns himself with doing the right thing rather than making money, knowing that the profit takes care of itself if the other things are attended to.”

• Doing the “right thing,” which is following your trading plan, takes practice and discipline. It means mean being able to stay confident in your trading plan even during a losing streak, and also setting proper trading goals. Goals, especially when starting out, should be focused on following the plan, not making money. For more on goal setting when you begin trading, see: Starting Out As a Trader? Here Are Your First Three Goals.

Final Word On the Millionaire Trader His System
Jesse Livermore’s system worked well for him, making him a millionaire trader when he followed it. Though the greatest enemy in trading is one’s self. Jesse failed to follow his system on many occasions, and since he wasn’t afraid to “swing a big line” of shares or futures contracts, when he deviated from him plan it often cost him dearly. While he made several fortunes, he was bankrupt or broke on a number of a occasions. Follow your plan, it’s what made you the money, and it’s also what will help you keep it.
By 1932 Livermore was divorced (for a second time), and remarried in 1933…to a woman who’s prior four husbands had all committed suicide (?!). Livermore would also take his own life in 1940, the same year his book How to Trade In Stocks was published. Nearly all of his massive gains had been eroded by 1932. Knowing his tendencies to deviate from his plan, earlier in his life he had set up trusts so his family would always have something. At his death, the trusts totaled about $5 million, equivalent to $84.55 million in 2014 dollars.
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