Go back

Lessons from Jesse Livermore

Born in 1877, Jesse Livermore is one of the greatest traders that few people know about. While a book on his life, written by Edwin Lefèvre, Reminiscences of a Stock Operator (1923), is highly regarded as a must-read for all traders, it deserves more than a passing recommendation.

Price Patterns

Jesse did not have the convenience of modern-day charts to graph his price patterns. Instead, the patterns were simply prices that he kept track of in a ledger. He only liked trading in stocks that were moving in a trend, and he avoided ranging markets. When prices approached a pivotal point, he waited to see how they reacted.

For instance, if a stock made a $50 low, bounced up to $60, and was now heading back down to $50, Jesse's rules stipulated waiting until the pivotal point was in play in order to trade. If that same stock moved to $48, he would enter a trade on the short side. If it bounced up off the $50 level, he would enter long at $52, closely watching the $60 level, which is also a "pivotal point."

A rise above $60 would trigger an addition to the position (pyramiding) at $63, for example. Failure to penetrate or hold above $60 would result in a liquidation of the long positions. The $2 buffer on the breakout in this example is not exact; the buffer will differ based on stock price and volatility. One wants a buffer between actual breakout and entry that allows them to get into the move early but will result in fewer false breakouts.

Timing the Market

Any trader knows that being right a little too early or a little too late can be as detrimental as simply being wrong. Timing is crucial in the financial markets, and nothing provides better timing than price itself. The pivotal points mentioned above occur in individual stocks and market indexes, as well. Let price confirm the trade before entering large positions.

Jesse Livermore believed no matter how much we "feel" that we know what is happening, we need to wait for the market to confirm our thesis.