25 Market Insights From Jesse Livermore


Join Our Newsletter Today & Get Powerful Ideas
Delivered To Your Inbox

1. The only leading indicator that matters
Watch the market leaders, the stocks that have led the charge upward in a bull market. That is where the action is and where the money is to be made. As the leaders go, so goes the entire market. If you cannot make money in the leaders, you are not going to make money in the stock market. Watching the leaders keeps your universe of stocks limited, focused, and more easily controlled.
2. Patterns repeat, because human nature hasn’t changed for thousand of years
There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure.
All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance, and hope. This is why the numerical formations and patterns recur on a constant basis.
I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans — and human nature never changes.
3. The obvious rarely happens, the unexpected constantly occurs
The market will often go contrary to what speculators have predicted. At these times, successful speculators must abandon their predictions and follow the action of the market. Prudent speculators never argue with the tape. Markets are never wrong, but opinions often are.
Remember, the market is designed to fool most of the people most of the time.
4. On the importance of sitting tight and being patient with your winners
They say you never go broke taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.
I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but also the intelligence and patience to sit tight.
After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.
5. You don’t have to be active every day
First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move….Second, it is the change in the major trend that hurts most speculators.
Always remember; you can win a horse race, but you can’t beat the races. You can win on a stock, but you cannot beat Wall Street all the time. Nobody can.
There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily– or sufficient knowledge to make his play an intelligent play.
Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.
6. It is what people actually did in the stock market that counted – not what they said they were going to do.
7. Successful trading is always an emotional battle for the speculator, not an intelligent battle.
8. I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of contrary opinion.
9. If you don’t have a plan, you will become part of someone else’s plan
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 without an actionable battle plan. Speculators without a single clear plan can only act and react, act and react, to the slings and arrows of stock market misfortune, until they are defeated.
10. If you can’t sleep at night because of your stock market position, then you have gone too far. If this is the case, then sell your position down to the sleeping level.
11. Remember that stocks are never too high for you to begin buying or too low to begin selling.
12. When I am long of stocks it is because my reading of conditions has made me bullish. But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions – or my prepossessions either – to do any thinking for me. That is why I repeat that I never argue with the tape.
13. Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.
14. I trade on my own information and follow my own methods.
15. But if after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should anyone ask for explanations? There are probably very good reasons why it should go down.
16. About scaling in and scaling out
When I’m bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stocks on a scale down, I buy on a scale up.
17. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.
18. A man must know himself thoroughly if he is going to make a good job out of trading in the speculative markets
19. When the market goes against you, you hope that every day will be the last day – and you lose more than you should had you not listened to hope. And when the market goes your way, you become fearful that the next day will take away your profit and you get out – too soon. The successful trader has to fight these two deep-seated instincts.
20. The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get rich-quick adventurer. They will die poor.
21. Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.
22. It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.
23. Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.
24. When you make a trade, “you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade.
25. To Sum Things Up
Don’t worry about catching tops or bottoms, that’s fools play. Keep the number of stocks you own to a controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities. Take your losses quickly and don’t brood about them. Try to learn from them but mistakes are as inevitable as death. And only make a big move, a real big plunge, when a majority of factors are in your favor….every once in a while you must go to cash, take a break, take a vacation. Don’t try to play the market all the time. It can’t be done, too tough on the emotions.
Source: ST50 & Livermore’s books

Get Powerful Ideas
Delivered To Your Inbox

Lesson #3 Jesse Livermore's Trading System- Top Down Trading

Wait until the Preponderance of Evidence is in your Favor. Use Top Down Trading. Be Patient!

Jesse Livermore

“Top Down Trading” (TDT) was Jesse Livermore’s unique trading system which outlines how one of the world’s most famous speculators read the tape.  Livermore emphasized the importance of keeping things simple by remaining as objective and unbiased as possible.  Here is the official checklist Livermore used every time he bought or sold anything:
The Market (TM): Livermore emphasized the importance of always knowing what type of market you are in before making a single commitment, on either the long or short side. He did this by checking the line of least resistance for the major averages and never used the terms bull or bear. Instead, he used: uptrend, downtrend or sideways. Once defined, he would only go long in a uptrend, short in a downtrend and stay on the sidelines when the market was trendless and moved sideways.
The Industry Group (TIG): Livermore always checked the underlying health of a specific industry group before he bought or sold a single share of any security. He always wanted to confirm that the industry group was moving in the same path of least resistance as the underlying stock in question. This step helped him reinforce his ideas.
Tandem Trading (TT): After confirming the entire industry group was moving in the same path of least resistance (up, down or sideways) as the underlying stock in question and the overall market, he would then look for another leading stock in the group and compare them (to make sure he was participating in the strongest 0r weakest name).
A.) The stock in question: Livermore only focused on leading stocks of the day. He notes that each market cycle produces a new batch of leading stocks and leading industry groups. Furthermore, rarely did prior leaders re-emerge during future cycles. Once he narrowed the universe of stocks down to a manageable list of leaders he would then study their historical prices and identify “pivotal points” (a.k.a ideal times to buy/sell the stock). He would only act if/when all the criteria were aligned and when the stock passed its “pivotal point,” and would immediately unload his position if the stock did not act the way it was supposed to act after passing that level (i.e. failed breakout).
B.) A sister/cousin stock in the group: Livermore was also very interested in how other stocks in the group acted before he committed his capital. He wanted to make sure other stocks in the group were acting well and moved in tandem with his theory (up, down or sideways) on the group. Again, everything else being equal he would participate in the strongest or weakest stock in the group.
Final Step in Top Down Trading: “Due Diligence” – Review all four criteria again: After he completed his process he would review all four criteria again to make sure he didn’t overlook anything and that he was indeed following his rules. Once everything was “inline” he would pull the trigger and had a very low tolerance for losing positions. Livermore never averaged down (which occurs when someone buys more shares as the stock drops to lower their average price) and always averaged up ( bought more as a stock advanced because the market is telling you are “right”).
A. The Market
B. The Industry Group
C. The stock in question
D. The tandem stock
*Source: How To Trade in Stocks: The Classic Formula For Understanding Timing, Money Management and Emotional Control by Jesse Livermore with updates and commentary by Richard Smitten
Professional Money Management Services – A Winning System – Inquire today!
Our skilled team of portfolio managers have adopted Livermore’s Top Down Strategy and only buy the best stocks when they are triggering proper technical buy signals. If you are not completely satisfied with the way your portfolio is being managed, Click here to learn more about our money management services. *Accounts over $250,000. ** Serious inquires only, please.

Lesson 2: Always Keep Your Losses Small & Never Fight The Tape!

This is Part 2 of my Lessons From Livermore: Part 1 can be found here:
Psychology plays a pivotal role in the market. People don’t like being wrong and since taking losses is an inevitable part of this business it behooves each of us to develop a sound plan for handling a setback.  A very important investment lesson is: “always keep your losses small and never argue with the tape!” Since most people do not like being wrong, they spend their entire lives trying to be right, even when the facts are against them.
Unfortunately, subscribing to this mindset will force you into a money losing strategy. So do what the smart investors do: they cut their losers and let their winners run! Livermore addressed just this topic in the early 1900’s:

“They say there are two sides to everything.  But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.  It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.  Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.”

Lesson 1 stressed the importance of developing “a sound market-tested trading plan, then trade your plan.” Lesson 2 discusses the importance of handling losses. Remember, losses are inevitable so don’t set them aside. Instead, prepare for them by integrating them into your trading plan. That way you can recognize when you are wrong, and instead of battling it out in the psychological warzone, you can cut your losses and get back to winning.
Professional Money Management Services – A Winning System – Inquire today!
Our skilled team of portfolio managers knows how to follow the rules of this fact-based investment system. We do not follow opinion or the “conviction list” of some large Wall Street institution which would have us fully invested even during horrific bear markets. Instead, we remain fluid and only buy the best stocks when they are triggering proper technical buy signals. If you are not completely satisfied with the way your portfolio is being managed, Click here to submit your inquiry. *Accounts over $250,000 please. ** Serious inquires only, please.

Lesson 1: Don't Be A Wall Street Fool


Reminiscences of a Stock Operator by Edwin Lefèvre and Roger Lowenstein is one of the most powerful investment books every written. Many people believe the book outlines the story of Jesse Livermore, one of the most famous stock market operators in history. The book contains a wealth of wisdom and prescient information that has stood the test of time. Many of the concepts are applicable today! Over the next few weeks, I will break down much of that “market wisdom” into a series of easy to digest blog posts.

Lesson 1: Don’t Be A Wall Street Fool

There are a million ways to make money in the market. Some are successful and some are not. Any succssful market operator can tell you that regardless of your trading strategy the one universal thruth to be a successful in the market is to develop and employ a sound market based trading plan. Otherwise, you will be at the mercy of your emotions which will lead to sub par results.
(For the purpose of these posts, I will atttribute any quotes to Livermore.)
Livermore said,

“My plan of trading was sound enough and won oftener than it lost.  If I had stuck to it I’d have been right perhaps as often as seven out of ten times.  In fact, I always made money when I was sure I was right before I began.  What beat me was not having brains enough to stick to my own game–that is, to play the market only when I was satisfied that precedents favored my play.  There is a time for all things, but I didn’t know it.  And that is precisely what beats so many men in Wall Street who are very far from being in the sucker class.  There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.  No man can always have adequate reasons for buying or selling stocks daily–or sufficient knowledge to make his play an intelligent play.
I proved it.  Whenever I read the tape by the light of experience I made money, but when I made plain fool play I had to lose.  I was no exception, was I?  There was the huge quotation board staring me in the face, and the ticker going on and people trading and watching their tickets turn into cash or into waste paper.  Of course I let the craving for excitement get the better of my judgment.  In a bucket shop where your margin is a shoestring you don’t play for long pulls.  You are wiped out too easily and quickly.  The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages….A stock operator has to fight a lot of expensive enemies within himself.”

Lesson 1: Don’ be a Wall Street Fool!

Develop a sound market tested trading plan, then trade your plan. Always remember there are times to be long; times to short and times to be flat. Write it down, it is VERY TRUE!!!