“It was the sittin’ and the waitin’ that made me all the money.”

This is a very famous, though often misunderstood (more on that later) quote by one of the best traders of all time, Jesse Livermore. He was an extraordinary trader who made fortunes short selling the stock market crashes of 1907 and 1929. During his career, he made it and lost it four times. Unfortunately, the last time he lost it, he committed suicide.

Jesse Livermore started out his career at the age of fifteen posting stock quotes in a brokerage house in New York. After having worked there for a while, he started putting together the various pieces regarding the movement of stocks and made a speculative buy, which made him more than he earned in a week posting quotes. Jesse figured it there would make no sense for him to keep on working from paycheck to paycheck and started speculating.

Millions gained, millions lost

He became famous after the crash of 1907, which he successfully sold short, convinced that margin calls would push the market down more violently than during an ordinary correction. After making multimillion dollar fortunes, then losing it all and returning with a vengeance, richer than every before, a mystical aura developed around him, but what made him even more interesting to the casual observer was the fact that after having many failed trades related to stock tips and sharing information with friends and delivery boys from Wall Street’s brokerages and banking behemoths, Jesse became very secretive. During his time, he was a very well known figure and people were very eager to get a glimpse of his positions. Jesse knew this and he did his best to avoid exposing his positions. He used hundreds of different brokers to hide his positions from the papers and Wall Street.

During his short life, Jesse Livermore wrote a book about stock speculation, titled How To Trade in Stocks. There is another great book out there on Jesse Livermore, Reminiscences of a Stock Operator by Edwin Lefèvre, which basically chronicles Jesse’s life as a speculator starting from when he was a ‘quote boy’. The latter is a classic and I encourage everyone to pick it up and read it. It’s a page-turner. As an alternative to buying or borrowing it from the local library of your friends, you can read it here, it’s free .

The famous quote and Jesse’s trading secrets

The quote mentioned above did not refer to buying and holding, which is the mainstream interpretation. Quite the contrary – the quote referred to waiting for a good buying opportunity and then buying.

Over many years, Jesse Livermore developed a unique trading method with many rules to follow. Some of them were technical, some of them were psychological. Back in those days, technical analysis was done by hand and that is one reason why so few people used it. The other reason was that most of what constituted technical analysis today, didn’t exist then. Jesse was one of the few people who were using it. But Jesse also had a lot of non-technical rules (scroll down for a short list of his trading rules).

Following the steps Jesse Livermore

Quite a few traders today use the trading methods of Jesse Livermore. One author, Richard Smitten has put great effort into trying to figure out the exact trading methods of Jesse and he has published his findings in a book titled Trade Like Jesse Livermore. In the book, he explores the technical aspects of his trading success and shows you how you can use these techniques to achieve success. The host of Financial Sense Newshour, Jim Puplava, has done an outstanding interview with Richard Smitten and it can be downloaded here.

As promised, here is a (basic) list of Jesse’s trading rules:

1. Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

2. Confirm your judgment before going all in.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.
There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade –  never when it goes against you.

3. Watch leading stocks for the best action.
Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.

4. Let profits ride until price action dictates otherwise.
“It never was my thinking that made the big money for me. It always was my sitting.”
One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position.

5. Buy all-time new highs.
The psychological merits of buying all-time or 52-week highs are immense and shouldn’t be discounted as a part of your overall strategy.

6. Use pivot points to determine trends.
When going long, traders are continually looking for confirmation by assessing the strength of a move. Higher highs and higher lows are a solid indicator that a current uptrend is merely taking a slight pause, and the odds of higher prices are in their favor. These same pivot points are integral to drawing support and resistance lines to give traders their line in the sand. Taken together, trend lines and pivot points can enlighten a trader to a change in momentum, which may change the character of a trade.

7. Control your emotions.
Our goal as traders should be to also make a critical yet honest assessment of the areas we can improve so the bottom line will support our claims of truly being seasoned traders. Adhering to the time-tested rules of Jesse Livermore would be a great start for anyone.

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