Foreword and Introduction to Stanley Kroll's Dragons and Bulls (1994)
For many years, I’ve wanted to write a book dealing with the strategy of trading both stocks and commodities, but for a variety of reasons, I never got around to doing it. However, upon relocating to Hong Kong in 1995.1 felt that the time was right, and I set to work on it in earnest. It's unfortunate that so much of current thinking attempts to separate the strategy of trading stocks from that of futures and most people think of the two markets as being worlds apart. In actuality, that is not the case.
Many experienced traders have come to the realization that speculative trading in both stocks and commodities have a great deal in common, notwithstanding many of the logistics being different. But, the basic tenets of sound trading strategy, of risk control and of the need for total discipline are common to both. The principal difference between the two markers is one of leverage, or gearing. Futures traders commonly tradee on as little as 5% of the market value, while stock traders must generally put down 50%. It is the leverage that principally differentiates the two. If futures traders had to put down 50% of the contract value and stock traders just $96, the situation would be completely reversed, Commodity trading would be considered conservative and sedate, while stock trading would be deemed risky and speculative,
This book acknowledges the vast difference in the gearing between the two markers. The strategies, mu-ii: and risk control elements of both markets; those areas where they differ and those where they are similar, are discussed. lt will become evident that the similarities are Far more signiﬁmnt than the differences and that being skilled in one market can deﬁnitely be a big asset when trading in the other. lt should be noted that generally the discussion is principally about trend following. that is. trading in the direction of the predominant trend. For example, buying on weakness into support is a preferred way to trade, but only within the context of a major uptrending market. If the trmd is down, even if buying into support, there is still likely to be losses. The same applies for selling short against an uptrending market. Advice on the size of the position to trade is a little diﬂicultr It is a bit like asking. ‘how big is big ‘ If trading against the trend. and sitting with losses, even one contract seems excessive. On the other hand, if trading with the predominant trend. with the market moving generally
in your favour, even a larger position can feel comfortable. However, to be more speciﬁc, in trading stocks, it is recommended that you do not use more than. say, 35% of your capital to margin positions; and for futures. not more than 25%. Furthermore, it is a good idea to diversify into about ten markets, to that a rniscalculation or mishap in one market can be cushioned by the performance of the overall portfolio.
Dividing the amount you have available for margin by ten (more for a big account) different markers, gives an indication of how big a position to take. And ﬁnally, no cliscussion of strategy, in any ﬁeld can be complete without some mention of ‘Murphy's Law.’ This isn't really a law, of coume, but an approach to events that, simply stated means ‘whatever can go wrong, will.’ So, whenever you are careless about forgetting to enter your protective stops or putting on too big a position in terms of a well balanced account even though ‘it looks‘ good on the chart, you are likely to become reacquainted with “Murphy's Lnw.' Remember the old saying ‘whether the pot hits the kettle, or the kettle hits the pot, it's likely to turn our bad for the kettle.‘ Wdl, the same reasoning applies to speculation; carelessness and ineptitude are rarely rewarded by proﬁts and favourably moving markets. Here is a ﬁnal word before you embark on this book. Readers are invited to write to me, care of the publisher, about any aspect of this book rhey would like to discuss further. I will respond to the best of my ability and time availability.
1 Introduction: The man they called JL
As the plump aluminium bird curved westward toward Fort Lauderdale, Floridlk the luminescent colour delineation between the Gulf Stream and the Atlantic Ocean was strong and clear. I slumped back in my seat while the jet began its ﬁnal approach, reﬂecting on the main reason for my Florida ﬁshing trip this Christmas holiday. I felt a compelling fellowship for a man they called J. L, and I was here because he used to come here. I could picture him in his heyday back in the 1920s; tall, trim and intense, seated by the window of the speeding New York to Florida passenger express. Anticipating days of ﬁshing and fellowship, relaxation and contemplation, and most important, a respite, albeit brief, from his heroic battles in the W/all Street and Chicago arenas. This was Jesse Lauriston Liverrnore.
Throughout this century, scores of brilliant or lucky market operators have had the heady and envious sensation of closing a position with a million-plus-dollar proﬁt. I, too, on a few occasions, have had the good fortune to be included in this exclusive group. But Livermore was in a class of his own. For the sheer scope and magnitude of his gutsy operations, for the disciplined and calculating way in which he bought and sold, for the lonely and detached hand that he invariably played, he has never been surpassed by any other lone operator.
Jesse Livermore was born in Shrewsbury, Massachusetts, USA, on 26 july 1877, the only child of a poor farming couples. At the age of 14, he left home for a job, earning US$3.00 per week as a board marker at a Boston brokerage oﬂice. From this modest start, and
through several years of apprenticeship, trading just small stock positions at various bucket shops along the East Coast, this quiet and dedicated young man became one of the most feared and admired market operators of the early part of this century. Other Wall Street operators nicknamed him, ‘The Boy Plunger.’
Liverm0re’s universe was price ﬂuctuations, both stock and commodity, and his obsession, the accurate analysis and projection of these prices. Edward Davies, one of the great ﬁnancial commentators of this era observed that, ‘should Livermore be shorn of every dollar, given a
small brokerage credit, and locked in a room with tickers and phones, he would reemerge with a new fortune.'
From my earliest Wall Street days, starting in 1959, Livermore was my hero. And, as l began developing my own expertise in price analysis and trading, he became my coach and mentor-in-absentia. Like many investors, I’ve been inﬂuenced by his tactics, his strategies and his market philosophy.
‘There is only one side of the market, and it is not the bull side or the bear side,’ he wrote in his book, Reminiscence of A Stock Operator, ‘but the right side.‘ That basic philosophy is indelibly etched in my mind, and I revert to it every time I read some lofty or tedious market analysis excessively focused on theoretical hype rather than practical market analysis and strategy. Like most traders, I frequently face the decision of which positions to hold and which to close out. And here, Livcrmore provides excellent, clear-cut counsel through a commentary describing his own mistakes:
‘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 close out what shows you a loss and keep what shows you a proﬁt.‘
However, Liverrnore's most signiﬁcant legacy to investors concerns an overall strategy regarding investment objectives. It is particularly relevant during these times when traders are becoming increasingly dependent on powerful personal computers and advanced software. Even relatively inexperienced traders are swinging in and out of sizeable positions on the basis of tick-by-tick and on-line short-term chart presentations. Pay heed to this piece of Livermore wisdom: ‘After spending many years on 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 was my sitting. Got that? My sitting tight. lt is no trick at all to be right on the market. You always ﬁnd lots of early bulls in bull markets and lots of early bears in bear markets. I have known many men who were right at exactly the right time, and began buying or selling when prices were at the very level which should have made the greatest proﬁt. And, their experience invariably matched mine. That is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a market operator has ﬁrmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade, than hundreds did in the days of his
Here is what Livermote said about losing money: ‘Losing money is the least of my troubles. A loss never bothers me after I take it. But being wrong — not taking the loss — that is what does the damage to the pocket-book and to the soul.‘ Regrettably, my Florida ﬁshing trip was much too short, and about a week later, I was back to the freezing weather in New York. V/hile waiting for the big ﬁsh to bite, I thought a lot about Livermore and his Florida ﬁshing trips, about his trading strategy and his considerable market wisdom. And while his catch was undoubtedly more bountiful than my own modest bunch of kingﬁsh, I enjoyed one advantage he couldn't possibly have had; I was able to study and enjoy his books.
I composed the above words some years ago, but they are as timely today , as the day they were written. They would have been relevant some 100 years ago, just as they will be 50 and even 100 years in the future. In 1849, Alphonse Hart said, ‘The more things change, the more they remain the same.’ That certainly applies to Livermore's investment strategies and tactics. Jesse Livermore was probably the most dynamic and successful lone wo1f speculator and investment strategist of this century, and possibly of all time. Although he died in 1941, his inﬂuence on succeeding generations of stock and commodity traders has been enormous. I count myself as one of his disciples, having read and re-read his writings countless times. And, upon arriving in Asia, I was astounded to ﬁnd how many stock and commodiry speculators here feel the same about this investment legend.
About ten years ago, I had in mind to write a book about Livetmorc, using ﬁrst-hand recollections from people who had known him and had worked with him in Wall Street in the 1920s and 1930s.
l advertised in ﬁnancial newspapers and magazines, seeking people with personal experiences of Livermore and his operations, but unfortunately, I was too late. I could not ﬁnd anyone with such personal, ﬁrst-hand knowledge. This was a big disappointment, but my own Wall Street career was active and busy, and l soon drifted away from this project into more constructive pursuits. However, l never fully discarded this Livemore project and, over the intervening years, I continued to study his writings and develop my own investrnent approach with the assistance of Livermore's considerable wisdom and experiences. Graduaﬂy, an idea developed. If I couldn't write a new and relevant book about Livetmore, why not write one with him? Write a book with a person who retired permanently over 50 years ago? A colleague suggested that the strain of over 30 years of ‘trench warfare‘ may have been too much for me; unless of course, l had some new theories on the subject of mortality. \X'/ell, I had no such creative theories on mortality. What I had, however, was the realization that
Livermore's tactics and strategies, although some of the best ever developed and enunciated for ﬁnancial markets, may have become, over the years, a bit dowdy and ‘tattered around the edges.' Perhaps they could stand to be updated and modernized, to be re-interpreted for a whole new generation of stock, commodity and options investors throughout the world; people who had grown up with fast personal computers, powerful software and on-line tick data which could be transmitted by satellite to the farthest corners of the globe with lightning fast speed? Developments and facilities Livermore could not even have dreamed about.
Traders in the 1990s and approaching the 21st century, analyse markets and enter orders in literally dozens of languages, while Livermore used only English and, quite likely, had never even heard a word spoken in any other language. To maximize usefulness, Liverrnore's teachings would have to be re-interpreted and modernized for scores of dynamic and active traders who had never heard a word in Livermore's 19th century New England dialect; and combine with my own relevant strategies.
As a matter of fact, I am sitting at my trading desk now in Hong Kong, some 12,000 miles from Wall Street. lt is here that I continue to ply my chosen profession, analysing and trading markets, alongside a myriad of financial operators who ply a similar trade in dozens of languages and dialects other than English. Thanks to modem satellite communications, I can ‘ﬁll’ market orders in the same split-second interval that it took to ﬁll similar orders from my desk in New York.
But, there is one inconvenience which unfortunately can't be overcome with modern technology. Being located on the other side of the globe Hong Kong is hours ahead of New York time, so in order to trade the New York and Chicago markets a late start - around 8 pm working through to the small hours of the moming is the order of the day. However, there are of course many compensations for an American living in Asia that easily overcome the modest inconvenience of working ‘the night shift.’