Jesse Livermore - short review of his book 1940

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Peterma

Well-Known Member
Hi all, since I'm a grandad now, been in business all my life, have some experience of 'the market', both good and bad, have read many books on trading I've decided to do a small review of Jesse Livermore's book of 1940 and then maybe later of Richard Wyckoff's two books 1910 and 1925.


These are the only authors who have made an impact on me - maybe because of their respective motivations in writing.

I'm not a trader by profession, I do trade as an 'enjoyment', my trading a/c is small but healthy.
I own a business which thankfully is also healthy, that business 'trades' Eur/Gbp, it exchanges the actual currencies as part of it's activities.

The book I'm reviewing has added material by Richard Smitten.

Some may say that times and markets have changed since the early 1900's,

'Wall St never changes, the pockets change, the stocks change, but Wall St never changes because human nature never changes' - JL

'Businessmen opening a shop would not expect to make over 25% on their investment in the first year. But to people who enter the speculative field 25% is nothing. They are looking for 100%.
Their calculations are faulty; they fail to make speculation a business and run it on business principles.' JL

I'll end this first post with Richard Smitten's words:

'Thank you Jesse Livermore, for your wisdom, hard work, and your high intelligence. And your never ending quest to learn the ways of the stock market'.
 
Averaging down - that practice of adding to a losing position in the hope of getting back to b/e - sometimes it works - most often not:

'So at the risk of repetition and preaching, let me urge you to avoid averaging down. I know one sure tip I got from a broker - it is your "margin call - when the margin call reaches you, close your account - never meet a margin call" - you are on the wrong side of the market. Why send good money after bad?. Keep that good money for another day. Risk it on something more attractive than an obviously losing deal.'
- JL

On that trait that many of us have had to deal with: Overtrading.

'The lesson here again is that speculation itself is a business and should be so viewed by all. do not permit yourself to be influenced by excitement, flattery or temptation. Keep in mind that brokers sometimes innocently become the undoing of many speculators. Brokers are in the business to make commissions. They cannot make commissions unless customers trade. The more trade the more commissions. The speculator wants to trade and the broker not is willing but too often encourages over-trading. The uninformed speculator regards the broker as his friend and is soon over-trading.
Now if the speculator were smart enough to know at just which time he should over-trade, the practice would be justified. He may know at times when he could or should over-trade. But once acquiring the habit very few speculators are smart enough to stop. They are carried away and lose that peculiar sense of balance so essential to success. - JL

On Risk:

'A person engaged in the business of speculation should only risk a limited amount of capital on any one venture. Cash to the speculator is as merchandise on the shelves of the merchant.
One major mistake of all speculators is the urge to enrich themselves in too short a time. Instead of taking 2 or 3 years to make 500% on their capital they try to do it in 2 or 3 months. Now and then they succeed.

But do such daring traders keep it?.

They do not. Why?.
Because it is unhealthy money, rolling in rapidly ..... such speculators are never satisfied.' -JL

Next post I will concentrate on the many positives in the book, including correlated markets, Top Down Analysis, Pivotal points and more.
 
Chapter 6 'The Million Dollar Blunder'

Livermore used correlation in associated markets to help in timing of entries and exits, many here will be familiar with this concept.

'But be careful timing is essential.....impatience is costly. Let me tell you how I once missed a million dollar profit through impatience and careless timing. I almost want to turn my face away in embarrassment when I tell this story.

Many years ago I became strongly bullish on Cotton. I had formed a definite opinion that cotton was in for a big rise. But as frequently happens the market itself was not ready to start. No sooner had I reached my conclusion than I had to poke my nose into cotton.

My initial play was for 20.000 bales, purchased at market. This order ran the dull market up 15 points. Then.. the market proceeded to slip back to the price it was selling at when I started buying. There it slept for a number of days. Finally, in disgust, I sold out, taking a loss of 30,000 dollars.

A few days later the market appealed to me again. I could not dismiss it from my mind, nor could I revise my original belief that it was in for a big move. So I re-bought my 20,000 bales.
The same thing happened, up jumped the market on my order, after that back down it came with a thud. Waiting irked me, so once more I sold my holdings.

This costly operation I repeated 5 times, losing between 25k to 35k , I became disgusted with myself.

So I gave Harry Dache, my office manager, an order to have the cotton ticker removed before my arrival the next morning. I did not want to be tempted ... .. It was too depressing, a mood not conducive to clear thinking that is required at all times in the field of speculation.

And what happened?

Two days after I had the ticker removed .. the market started up, and it never stopped until it had risen 500 points....
I had thus lost one of the most attractive and soundest plays I had ever figured out. ' - JL

Livermore reasoned that he had learned 2 lessons -

First patience - wait for the market to demonstrate that your premise is correct.

'Secondly, to allow myself to become angry and disgusted with the cotton market was not consistent with good speculative behaviour.
I have long since learned not to make excuses when wrong. Just admit it and try to profit by it.' - JL


In the next chapter he details how he made 3 million dollars in wheat and using the Rye market.
 
Yeah, this book is packed with such knowledge - I just opened at random:

' One of the problems with looking too deeply into economic news is that it may plant 'suggestions' in your mind, and suggestions can be subliminal and dangerous to your stock market health where you have to deal in reality. These suggestions are very often logical but that does not mean that they are true and will effect the market.' - JL

' The only area where I have differed from most speculators was where I felt I was truly right, dead right, for damn-sure-right--then I would go all the way, shoot the works.

The way I did during the 1929 market crash when I had a line on 1 million shares on the short side - every rise and fall of one point meant one million dollars to me' -JL

This book was completed in 1940, the same year as Mr Livermore's death, it thus contains all his experience - ' I offer my suggestions as one who has travelled the road before you' - JL
 
Entries And Exits:

Jesse Livermore had a mantra ' the line of least resistance' - that was the direction he always looked for.

Before entering a trade he would knew that' the sittin and the waitin .... BEFORE the stock was purchased'.

He waited for 'all factors to come together to merge into the perfect trade, or as perfect as possible. My personal rule: make sure that you have placed as many factors in your favour as possible and never RUSH into any trade.' -JL

'Go slow -don't risk all your capital ... protect it - the only exception is when you are playing with the House's money the capital made directly from th market' -JL

Livermore repeated a number of times that he would leverage up only when he was using market money - indeed this was also a mantra - do not take your profits out too soon, wait for a valid signal to exit.

The factors that Livermore waited so patiently on before entry were:

'the overall direction of the market, the sister stock activity and finally the timing was correct and an important Pivotal Point was reached' - JL

He was using TDT (Top Down Trading), HTF bias, correlation in 'sister' markets and finally the all important Pivotal Points.

His exits were also based on these factors including Pivotal Points, indeed he viewed this as 'the key to my later theory of trading is to trade: ONLY ON THE PIVOTAL POINTS. I have always made money when I was patient and traded on the Pivotal Points'-JL

He would only exit on 'danger signs' including his 'one day reversal'
He defined the ODR as 'This is a stock movement that often happens at the end of a long-term move. ... it 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 that the volume of the previous day' - JL

Next and last post is on those Pivotal Points
 
The 'Pivotal Point' was of huge significance to Jesse Livermore, so much so that I think I'll re-read the chapter and other information regarding his record -keeping before posting, I do not wish to do this important aspect of Mr Livermore's work an injustice.
 
Peterma said:
The 'Pivotal Point' was of huge significance to Jesse Livermore, so much so that I think I'll re-read the chapter and other information regarding his record -keeping before posting, I do not wish to do this important aspect of Mr Livermore's work an injustice.
Click to expand...

I've always been curious about PPs... I mean, the logical side of me says "ultimately they are arbitrary and they shouldn't work any better/worst than a given price point"... but then I see so many traders paying attention to them I think they have a bit of a self fulfilling prophecy kicking in, and like any given TA tool, if used properly they appear to be pretty powerful.

Of course, I've seen them used far more in equities trading than in FX.

So yeah, I'm all ears about Livermore's use of PPs.
 
Peterma

I read Livermore's book(s) many years ago, about the time I 'already knew' all there was to know about trading.

After reading your concise review I realise that most in wisdom in the book went straight over my head, so another read is in order.

I'll look forward to your further the reviews, on Pivotal Points.
 
Jack - When I first read the book I too thought - ah.. pivot points .. which I use, usually keeps me out of silly trades - but Mr Livermore, it seems, was speaking of something else.

He kept a detailed explanation of his 'pivotal points' until the end of his writings, although he devoted an earlier chapter to explaining how his detailed record-keeping caused him to 'discover' the phenomenon.

His book began in 1939 and finished in 1940, he was a very private person, never ever given, despite many requests, to giving stock market advice or tips, in his own words "my answer has been a blunt' I don't know'."

He employed 5 'board men' - their job was to write the ticker prices up on a chalk board, he also had a front desk man, PA we would now call them, you had to go through him to talk to Mr Livermore, apparently no easy task.

For him to agree to write 'how I trade...' was significant and was very, very uncharacteristic, he saw the market as a challenge. a puzzle, some people felt that the challenge for him was gone, his writing was his last challenge.

Ego could not have been the root of his writing:-

'I want to emphasize the fact that : I do not consider these records perfection, except as they serve me.
I do know a basis is there for anticipating future movements and if anyone will study these records, keeping them themselves, they cannot fail by it in their operations.'
It would not surprise me if the persons who in the future follow my methods of keeping these records get even more out of them than I have ' - JL

Rod, good link, everyone puts their own 'bias' on the traders from the past, absolutely something I hope not to do with Mr Livermore's work, time for him was important - "I believe that by keeping proper records and taking the time element into consideration - one can with a fair degree of accuracy forecast coming movements of importance, but it takes patience to do so" - JL

I'm not yet 100% sure what he means his constant reference to 'time'.
 
I've always assumed that Livermore's ''pivotal points'' were a method of identifying trend, similar to the concept Market Structure using swing Highs/Low.
 
Richard Smitten explored Pivotal Points in detail, reference below.

Edwin LEFEVRE (Jesse LIVERMORE), 1940, "Reminiscences of a Stock Operator"

Jesse LIVERMORE, 1940, "How to Trade in Stocks (the Livermore Formua for Combining Time Element and Price)"

Paul SARNOFF, 1967; "Jesse Livermore: Speculator-King"

Richard SMITTEN, 2001, "Jesse Livermore: World's Greatest Stock Trader"

Richard SMITTEN, 2005, "Trade Like Jesse Livermore"
- Chater 4 - p47-76, Pivotal Point Trading
 
"The Livermore method, my method, of recording prices in conjunction with the 'Timing, Money management, and emotional control rules' is the result of over 30 years of study of principles that would serve me in forming a basic guide for the next important market move.
After making my first record I found that it did not help me to any great extent. Weeks later I had a new thought that aroused me to fresh endeavors ....Successively new thoughts would come to mind.
Gradually, after making many of these I began to develop ideas I did not have before, and each succeeding record I made began to shape itself into better form.
But from the time I started to merge the time element with price movements, my records began to talk to me!" -JL

The outcome of this learning process was what Mr Livermore termed 'Pivotal Points'.
On his first attempt at using these points his purchased stock increased three-fold before selling.

Livermore disliked the notion of being bullish or bearish - "these words are not in my vocabulary" - he preferred to wait on price.

It would seem that PP hinge at KEY s/r levels, he would wait until price would reach these levels, then watch closely for reaction.

"For Example: Take a stock that has been in a downward trend for quite some time and reaches a low of 40.
Then in a few days it has a quick rally to 45, then it back fills for a week in a range of a few points.

The market become dull and inactive for a few days.

Then one day it becomes active again and goes down 3 or 4 points until it reaches it's PP of 40.
Right here is the time the market should be watched carefully, because if a stock is going to resume it's downtrend in earnest it should sell below 40 by 3 points or more before it has another rally of importance.

If it fails to pierce 40 it is an indication to buy as soon as it rallys 3 points from the low price made on that reaction.

If the 40 price has been pierced but not by the proper extent of 3 points then it should be bought as soon as it reaches 43.

If either one of these 2 things happen you will find, in the majority of cases, that it marks the beginning of a new trend, and if the trend is going to confirmed in a positive manner, it will continue to advance and reach a price over the PP of 49 by 3 points or more." -JL

Pivotal Points trading was used by Jesse Livermore in 3 ways:-

First to enter a trade in the same direction as the prevailing trend,
Secondly, to enter a new trend at it's beginning,
Thirdly, to exit a trade.

He had one objective - immediate profit on trade entry, if the trade went sideways for 3 days he would exit, if price started to go against him he would exit.

Think I'll read this book all over again.
 
Often when I finish a book written by a trader I will stop and think 'what ONE thing stood out most, which aspect of the trader's experience has the most impact on my market thinking - which single line of thought may I adopt to better my market experience?

In Jesse Livermore's book there are many different pieces of teaching, much of that teaching, such as patience, over-trading, focus, top down trading (analysis), key prices - I have encountered in the vast ICT video library.

The one thing, which I probably saw in all of ICT's videos, the single thing that impacted on me most:

"I would here explain that I do not take the action of a single stock as an indication that the trend has been positively changed for that group.
Instead I take the combined action of two stocks in any group before I recognize the trend has definitely changed,...." - JL

Jesse Livermore published copies of 16 of his records, these records that 'talked to him', the records were the prices of US Steel and Bethlehem Steel - two correlated stocks.
 
Peterma said:
"I would here explain that I do not take the action of a single stock as an indication that the trend has been positively changed for that group.
Instead I take the combined action of two stocks in any group before I recognize the trend has definitely changed,...." - JL
Click to expand...

That's interesting.. but given the business risk built into stocks it's pretty much required: One company's blunder does not make a down market.
 
Peterma said:
"For Example: Take a stock that has been in a downward trend for quite some time and reaches a low of 40.
Then in a few days it has a quick rally to 45, then it back fills for a week in a range of a few points.

The market become dull and inactive for a few days.

Then one day it becomes active again and goes down 3 or 4 points until it reaches it's PP of 40.
Right here is the time the market should be watched carefully, because if a stock is going to resume it's downtrend in earnest it should sell below 40 by 3 points or more before it has another rally of importance.

If it fails to pierce 40 it is an indication to buy as soon as it rallys 3 points from the low price made on that reaction.

If the 40 price has been pierced but not by the proper extent of 3 points then it should be bought as soon as it reaches 43.

If either one of these 2 things happen you will find, in the majority of cases, that it marks the beginning of a new trend, and if the trend is going to confirmed in a positive manner, it will continue to advance and reach a price over the PP of 49 by 3 points or more." -JL

Pivotal Points trading was used by Jesse Livermore in 3 ways:-

First to enter a trade in the same direction as the prevailing trend,
Secondly, to enter a new trend at it's beginning,
Thirdly, to exit a trade.

He had one objective - immediate profit on trade entry, if the trade went sideways for 3 days he would exit, if price started to go against him he would exit.

Think I'll read this book all over again.
Click to expand...

So clearly I had JL's PP's mixed up with Pivot Points (daily pivots) when I first posted here. heh..

What you're describing sounds a lot like playing out double bottoms in a stock. It also sounds like JL liked to both see it confirmed (having already based and reversed by 3 dollars) and didn't like holding the trade unless it's really moving for him.

Reminds me of something one of my first managers told me as a pup:
"The market needs to just go. It does not wait around for you to get on board. The market doesn't care if you got your shares or not. It doesn't care about you. Price isn't going to stick around and ask you if you're sure you didn't want to get in position since it's about to take off. It, just, goes. If not, then the trade might not work out the way you hoped." (I'm paraphrasing a bit..)

Funny enough, the same manager used to love a setup called the 'dirty W'. It was a double bottom where the return to the low involved going just a scratch lower then reject hard back up. He'd punch in on the snap move and set a stop at the recent low it created. The whole setup creates a really tight risk control while having a lot of room for play to the upside. The only catch was profiling the types of stocks you'd want to take this trade on, and obviously not doing this with stocks that are in the news for something hella negative (since trying to pick a bottom on an in-play stock is asking for pain.)
 
Jack said:
That's interesting.. but given the business risk built into stocks it's pretty much required: One company's blunder does not make a down market.
Click to expand...

Yeah, he used correlation as a 'smart money tool'.

He gave an example: as ww11 broke out in 1939 there was a market correction, then late 1939 a market rally. Strangely, steel stocks refused to rally despite the anticipated rise in demand for steel and the overall market rally.

Livermore pointed out that it didn't matter to him the 'why', correlation had broken down and that told him not to buy steel, in his view anyone following his method would have done likewise.

Many months later the reason became clear - the UK and Canada governments had off loaded large quantities of steel shares.

He was making the point that often we do not know the 'why', correlation will give, in his words, 'the danger signal'.
 
Peterma said:
Many months later the reason became clear - the UK and Canada governments had off loaded large quantities of steel shares.

He was making the point that often we do not know the 'why', correlation will give, in his words, 'the danger signal'.
Click to expand...

When you're large enough to BE the market, then you gotta sell into strength like that so you don't end up crushing the market yourself and making price all the worse for you.
 
Very valid point, was for Livermore, many times he was aware that his trades were moving the market - hence he always, actually got into the habit of, entering his trades by averaging up - I wonder do the large movers in FX still do the same?
 
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