A Quick Biography
Jesse Livermore was born in 1877, and even though technology has changed a lot since his time, his book How to Trade in Stocks, and the book which chronicles his early trading career (his name is changed in the book) Reminiscences of a Stock of Operator by Edwin Lefèvre, still offer a ton of valuable insight to traders. Jesse Livermore ultimately became a swing trader and longer-term trader, but he started as a day trader, and this is where he made his first fortunes. The following five tips were offered by Jesse and day traders can surely use them. This trading advice may be almost 100 years old, but it’s as relevant as the day it was conceived.
The 5 Trading Lessons
Only Buy Strong Stocks in a Bull Market and Only Short, Weak Stocks in a Bear Market
Bull and bear markets happen when stock prices are rising or falling overall, respectively. Stocks, as a whole or market, are represented by a major index, such as the S&P 500 in the U.S. Therefore, when this index is in an uptrend, focus on taking long trades in the stocks which are strongest. When the index is in a downtrend, focus on taking short trades in stocks that are the weakest. You shouldn’t be making these trades arbitrarily; they need to be based on a sound trading strategy. The above helps you figure out which stocks to trade.
If You Don’t Have a Trade Setup, Don’t Trade
Developing a strategy and a trading plan takes time and work, but once in place, all you need to do is follow it. If the market isn’t providing trade setups based on your trading plan, then you shouldn’t trade.
Trade With Stop Loss Orders, and Know What That Level Is Before You Take a Trade
Any trade could be a loser, no matter how good it looks at the outset. Always use a stop loss order, and make sure that it gets you out of the trade if the stock drops to your stop loss price level. Successful day traders don’t waffle about when they should exit. They know when, where, and how they’re going to get out before they even place the trade.
Don’t Average Down
Averaging down is when you add money to a losing a position. If you already have a full position (the maximum size position your trading plan allows) then adding to that position when it’s losing money is a significant lapse in discipline. Averaging down can deplete your capital very quickly, especially if done multiple times, as the price keeps going against you.
Don’t Follow Too Many Stocks
Don’t dilute your focus and efforts by following too many stocks. Instead, focus on trading the strongest stocks in a bull market and the weakest stocks in a bear market. It limits the number of stocks you trade to a handful. Any more than that, and it becomes hard to track them all and trade them adequately. The more stocks being watched, the more likely it is you’ll miss the important moves you’re waiting for.
Trading Successfully
Jesse Livermore was an extremely successful trader, but he also experienced the downside by losing and regaining his large fortune several times. He blamed his losses on just two things he had overlooked:
He had not fully formulated his trading rulesHe did not follow his rules
These two problems still likely cause traders to incur losses today, as they always have. Livermore was a big proponent of developing a trading system and making sure to stick to it when trading.
