Jesse Livermore - short review of his book 1940

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Peterma said:
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?

Absolutely they do... but they aren't limited to it.

The large guys use all sorts of tools to manage execution of large orders.

For instance: The buy side traders who work for funds/firms (as opposed to sell side traders who work for liquidity providers / banks / dealers / etc.. and aren't taking a trade so much as just filling an order,) could just put a TWAP/VWAP algo (buy/sell program) on to process the order gradually (often with slight variations in each execution to reduce signaling risk.)

Others might just RFQ (request for quote) their large order to their dealer and see what price they can get the whole thing processed for up front. This would be like saying "yo, JPMorgan, I need $800MM worth of Euro like, right now dawg, what's it going to cost me?" and JPM looks up the spot price, depth, etc, and gives them an off market quote that hopefully is better than what the trader would pay should they just market the entire order and experience hella slippage getting filled.

There are many other options as well.

So it all depends on that firm/fund's style and what they've determined to be the best order processing method for their trade idea. But yes, the risks of large orders are still there.

Heck, Soros (when he "broke the BoE") went out of his way to not only average 'up', but tell the world what he was doing (accepting signaling risk) so others might join in and help pressure the currency against the BoE. He needed the help after all, since he was fighting a central bank, and that's usually a ticket to the poor house. :p

While FX is the most liquid market in the world, people still have to deal with the risks that come with ultra large orders (relative to the market's depth and liquidity) and how such orders are processed. But, just how they deal with such risks can be very different depending on order sizes, strategies, counterparties they are dealing with and related relationships, etc...

So with all that being said, thankfully FX is just 'money' after all, and that means the liquidity available is high enough that most of us retailers won't ever have to deal with such problems. I mean, it's easy for banks and liquidity providers to pair off their risk when they fill your order (if they want to) so finding liquidity isn't very hard. (Unlike buying Steel like the Livermore example that is.)
 
Good info, averaging up, or adding to an existing profitable trade is something that I've never practiced, though I have often contemplated.

I have unfortunately done the opposite - much to my cost.

Livermore countenanced to average in early in the trade, but only as each entry is profitable, in this way he felt that he was right side of the market.
Wyckoff, on the other hand, felt that a trader who was averaging in was 'groping'.

Both agreed that the large movers averaged, - I often think of this when I see a fast action going down past say 00 on down to 75 and then rise back up to 10 - there it will wait for a while, many (usually including myself) were long and have been stopped out, revenge coursing, now hit the buy button again - only to see it fall a second time (the remaining averaging sells now on board)

I figure that both were right, Livermore would have gone short at 10 or added to his position if he was already short, Wyckoff, if he was short would have just watched the tape or he would also have gone short at 10. - myself, on the other hand, being long, would either average down at 10 (it HAS to go up) or re-entered long (since I was right in the first place).
 
Peterma said:
I have unfortunately done the opposite - much to my cost.

There are times when it's entirely appropriate to average down: When you've planned to do so within a range of price before hand, and thus, your orders combined don't violate the max risk you wanted to allocate to the trade should you be stopped out.

But when it comes to just averaging down without a real plan, or just to avoid a loss, then I feel strongly about avoiding it: Losers Average Losers

--

For me, personally, I like to average 'up' in my trades, even if they are only short term intra-day moves.

I see it like this in terms of averaging up vs down: You're either going to have the largest exposure when you are the most correct (moved for you) or the most incorrect (averaged down.) So instead of taking small winners with the chance I have a huge loser once in a while (most exposure tied to worst trade, ie, averaging down,) I'd rather take small losers or scratch trades with a chance of having a huge winner once in a while (most exposure tied to best possible trade outcome.) Combine this with a trading system that has a decent win rate and your trade (return) expectancy shoots through the roof.

Or, put another way, if an edge is good enough, you'd never need to average down at all, and doing so only blunts the edge.

Of course, and especially in retail FX, many traders will defend averaging down with their last breath... and can even get offended when I tell them that losers average losers... but you know what? Every time I get someone who disagrees, I just explain my side of it then wait; as time passes, I'm still here trading profitably, and they tend to disappear or wash out. (heh.. 'defend to their last breath.')

(Again, to be clear, averaging down can be perfectly fine so long as you're planning a blended entry over a price range and have an 'out' if things go bad. My critizm is only against averaging down blindly to avoid taking a loss. I just want to be clear.)
 
Yep, for J. Livermore the averaging IN was important.

If he was onto a winner then each entry would have to show a positive result, or at the very least not a negative result, for him negative meant wrong - plain and simple.
As he entered in, and as each entry became positive, it would reach beyond what many would countenance as an acceptable leverage level today.

My own experience, indeed my first encounter with averaging was during the dot com bust.

My advisory broker was urging that the sensible action was to average the cost of the downward spiralling shares - it seemed so very logical - pity I hadn't yet met Mr Livermore.

Someone reading may think ' nah i'd never do that' - but this is the problem with bias, being bullish or bearish, you become fixated, you are right, price is going down and therefore more of a bargain buy, you don't see it as a sell, so you buy more to decrease your cost.
 
Great thread I really enjoyed reading through these golden nuggets, I'd like to share a newspaper clipping of the late Jesse L Livermore dated September 2nd 1908. ;)
 

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Another interesting Jesse L Livermore August 1909 Newspaper clipping
 

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sherif said:
Line of Least resistance, what does that mean in Jesse Livermore view point?

http://www.collinsdictionary.com/dictionary/english/line-of-least-resistance

It's really now known as "Path of Least Resistance".
 
Thank you sqa,
but i am looking for Technical analysis, i mean Line of Least Resistance is it higher low after pivotal point??
 
I have studied his 'record keeping' many times, he did not keep 'graphs', instead he kept charts which recorded price turning points.

When he recognized that price had reached a turning point (pivotal point) and has reacted accordingly, then he simply looked to where was it's next PP, ie the path of least resistance.

A little like cable at present. He would watch closely whether price would break 7050 to the upside, then he would look for the next resistance level.

I often think that Mr Livermore's approach to the market was brilliant in it's simplicity.

Lex Van Dam sums him up best: "Livermore was a high-momentum trader....The cornerstone of his philosophy was to add to winning positions and cut losses quickly".

His philosophy fits so easily into the FX market, you see good news for GBP, up goes price past a previous resistance, no news for a few days, in kicks momentum, maybe some more good news, more momentum - so add to the long.
On the other hand, you go long, in comes some bad news, more momentum to the down side - exit at once.

BTW, if ever you happen to read that Mr Livermore died broke, not so - he was worth over 5 million usd when he died.
 
I chose the 1940 writings deliberately, these were almost like his last testimony to the learner;

"He explained to his sons:

I believe that having the discipline to follow your rules is essential. Without specific, clear, and tested rules speculators do not have any real chance of success. Why, because speculators without a plan are like a general without a strategy, and therefore an actionable battle plan.

Speculators without a single clear plan can only act and react, to the 'slings and arrows of stock market misfortune,' until finally they are defeated."

To those that say successful traders are born, that they have innate talent that cannot be learned -

" I believe anyone who is intelligent, conscientious and willing to put in the necessary time, can be successful on Wall Street. As long as they realize the market is a business like any other business - they have a good chance to prosper."
 
I touched on the subject of being bullish or bearish previously - I suspect that this affects all of us, even if we are unaware.

"I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator, hope, fear and greed are always present, sitting on the edge of our pyches, waiting on the sidelines, waiting to jump into the action, plow (plough) into the game.

This is one of the reasons I never use the words 'Bullish' or 'Bearish'. These words are not in my vocabulary, because I believe these words create an emotional mind - set of a specific market direction in a speculator's mind. The words 'Bull' and 'Bear' cause a trader to get a fixed mind-set. And there is a good chance the speculator will blindly follow that trend or direction for an extended period of time , even if the facts have changed."

So if you asked Mr Livermore, are you bullish on GBP at present, he would answer:-

"I say that the market is currently in an upward trend or a downward trend or a sideways trend - or I tell them that the line of least resistance is currently up or down ... that is all I say.

This leaves me with the flexibility to change my mind , according to market behaviour. I never try to PREDICT or ANTICIPATE the market. I only try to REACT to what the market is telling me by it's behaviour.

I firmly believe that that there are always clues as to what is going to come next. The clues are buried in the behaviour of the market - what the market actually does - the here and now - not what is predicted that it will do.."

(caps are not mine, I like his use of the word 'behaviour', I often think that there is such a difference in 'price action' and 'price behaviour' - but maybe that's for a different thread :))
 
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