Friday, April 11, 2014

Wisdom of Jesse Livermore

Great lessons from Reminiscences of a Stock Operator. Adam Hamilton, CPO dissects the ethos behind one of the world's greatest speculators.
In this analysis, Livermore defuncts day trading and the 'need for action' to take homw $$ every day

(Chapter II) … “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.”


This classic Jesse Livermore quote picks up just where we left off in the first essay, on the perpetually popular game of day trading.  Livermore was not fond of day trading and he touches on the great dangers of it many times in his discourses.  He advocated a much more patient strategic speculation approach.  This broader perspective and slower pace of trading helped him to ultimately harvest far higher profits and avoid the immense stress and pitfalls of ultra-short-term speculation.


Livermore believed that a speculator should diligently study the markets and then patiently stalk any potential trades.  He felt that speculators had a much greater probability of succeeding if they intelligently defined a potential entry point in advance through careful research and then patiently waited for it to actually come to pass in the real-world markets.  This led to staking intelligent positions and eliminated the possibility of the dangerous unthinking “impulse trading” so common in day trading.


Once his carefully-planned positions were deployed, Livermore advocated the strategic side of short-term speculation, holding carefully targeted positions through an entire bullish or bearish swing of the markets.  Sometimes these swings lasted weeks, usually they lasted months, and occasionally they lasted more than a year.  Over and over Jesse Livermore emphasizes that these strategic-oriented position trades had both the highest probability of success and the highest potential profits as rewards for being right.


Today’s speculators can learn a great lesson from the Livermore quote above.  The really big wins in trading don’t come out of daily scalping, but out of diligently riding entire major bullish and bearish market swings.  Jesse Livermore wisely points out that those who “desire for constant action” and trade regardless of underlying big-swing market conditions face “many losses”. 


Speculation is like a grand real-world game of chess, a thinking-man’s strategy game sprawling out into the unknown future across weeks and months.  If you want to have a shot at growing into an elite speculator, you are best off ignoring the small gains and losses of day trading and holding out for the really big wins possible by riding entire bull or bear swings.  Speculators are not “working for regular wages” and don’t need small daily wins, all we really need are the enormous Big Trade wins that usually appear several times a year or so.


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"There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time."J Livermore Manchester City FCl Crude Palm Oil


From Dragons and Bulls by Stanley Kroll
Intro and Foreword
The Importance of an Investment Strategy
5 The Art of War, by Sun Tau (circa 506 BC) and The Art of Trading Success (circa AD 1994)
That's the way you want to bet/a>
Long-term v Short term trading
Technicals v Fundamentals
Perception v Reality
Part 1: Winners and Losers
Part 2: Winners and Losers
Sun Tzu: The Art of War
Those who tell don't know, those who know don't tell
Why there is no such thing as a "bad market"
The Secret to Trading Success
The Experts, do they know better?
Risk control and money management
Good advice
The 'good bets' business by Larry Hite
Don't lose your shirt
Ed Sykota's secret trend trading system