2 Feb

Trading Tips From Jesse Livermore

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You can gain a lot of wisdom from legends like  Warren Buffet, Ray Dalio, Paul Tudor Jones, and Jesse Livermore.

By applying the lessons from the industry titans you can learn some incredible trading tactics…that can be applied to any markets.

That’s why I want to share with you some famous quotes that have resonated with me throughout my career.

 Learn how to apply it to your trading and your account is sure to grow.

 

Trading Quotes That Made Me A Better Trader

 

There are many traders who have come and gone, most of which nobody will remember the names of.  

For good or bad, a few lucky ones have stamped their mark in history for everyone to see.

Jesse Livermore

Jesse Livermore is arguably one of the most famous traders in the history books.  

The story of Jesse Livermore in Reminiscences of a Stock Operator is a must-read for new traders in the stock markets and a common favorite among the pros.  

Born in 1877, Jesse Livermore began trading at the age of 14 and is considered a pioneer of day trading.  

At one time, Jesse was considered to be one of the richest people in the world and made his fortunes going short the markets.

Some of Jesse’s legendary trades were his short position during the 1906 San Francisco earthquake and the 1929 Wall Street Crash.

Unfortunately, the story doesn’t end well for Jesse as he went on to lose all of his wealth and ultimately he committed suicide.  

Still, there are powerful lessons you can learn as trading principles that worked then still apply to today’s markets.

Here is a list of Jesse’s top market insights.

  1. The only leading indicator that matters – watch the market leaders.
  2. Patterns repeat because human nature hasn’t changed for thousands of years.
  3. A stock is never too high to buy and never too low to short.
  4. Markets are never wrong – opinions often are.
  5. You can win on a stock, but you cannot beat Wall Street all the time.

1. “The only leading indicator that matters – watch the market leaders.”

So here’s the deal…

If you want to buy stocks, it’s best to focus on only the strongest ones, or the market leaders.

Why?

Because these are the ones likely to outperform the market in the future.  

Don’t believe me?

First, let’s think of it this way…

Would you ever go to the horse track and bet on the weakest horse that walks by?

Heck no!

Instead, you would put your bet on the horse that looked the healthiest and strongest!

So why would you do that with the stock market?

Think of a stock trading at its 52-week highs as being the strongest horse in the race, and a stock trading at its 52-week lows being the weakest horse at the race.  

Just like the strongest horse is a favorite to win the race, chances are the stock trading at 52-week highs is also the strongest stock to win the trade.

Make sense?  It does to me…

Which is why it’s best to focus on:

  • Buying the strongest market leaders
  • Buying strongest stocks (stocks near 52-week highs)

Why pick these?

Like the horse betting example, these are the ones likely to outperform the market!

Let’s look at some examples:

How about this 100+% winner…

 

 

Or how about this 50% winner…

 

 

As you can see, if you trade stocks, you need to focus on buying market leaders.

… Focus on buying the strongest stocks.

Because these are the ones that are most likely to outperform.

Learn how to use volume analysis and find breakout trades here

Next…

 

2. “Patterns repeat because human nature hasn’t changed for thousands of years.”

Here’s the deal…

This means that if something has happened in the past it will happen again in the future.

Remember, the markets are primarily driven by two emotions – fear and greed.  

When the market is fearful, you get a downtrend.

When the market is greedy, you get an uptrend.

And when the market is undecided, you get consolidation or a range-bound market.

But… you are probably thinking to yourself… the algo’s are emotionless, and human nature doesn’t matter.

That’s still wrong!

For example…

What if a trading system does poorly?  Even though it’s an algo, there is a person watching it go to work every day.  

And if it’s not making money, the trader will become fearful that the algo is “broken” and begin to intervene and possibly even pull the plug on the trading system altogether.

Or perhaps the system does so well that greed kicks in?  A human trader will most likely keep increasing the trading size every day… adding even more risk to the system.  Possibly so much more than it was originally designed for exposing the account to excessive risk levels.  

You see…That’s why Jesse Livermore said…

“Patterns repeat because human nature hasn’t changed for thousands of years.” – JL

And it couldn’t be more true!  Greed and fear have existed from the beginning of the stock market, and with algo trading, it is no different.

 

3. “A stock is never too high to buy and never too low to short.”

This is a tale as old as the market itself.  

Let’s take a quick look at a stock chart

 

 

Would you buy it here?

Probably not!

Why?  

Since it’s moved too far and way too fast, you think it can’t go any further.

Or…

The price is so high, the market must reverse soon.

It’s hard but that’s human emotions.

Now, check out the next chart below…

 

 

Apparently, what was “high” just went significantly higher!

So this is the lesson…

Buy low and sell high – it’s not the only way to make money.  

Because you can also buy high and sell higher!

The key here is to embrace both ideas of trading.  

 

4. “Markets are never wrong – opinions often are.”

Have you ever heard traders say stuff like…

  • “This stock is already at its lows.  It can’t possibly go lower.”
  • “I’m not wrong.  My analysis is correct.”
  • “The market doesn’t know what it is doing.”

Here’s the truth…

Playing the blame game will never make you the best trader.  

Do you think Derek Jeter ever blamed someone else for his mistakes?

Heck no!  He took responsibility for every decision he made!

So why do you do this while trading?

It’s not the fault of the market, of the broker, or even the strategy.

As a trader, you need to accept that you can be wrong, and can make the necessary changes to improve on your mistakes!

This will have you respecting the markets and accept what happens.

So how does this apply to my trading?

I’ve learned that I must always use hard stops and control my losses with proper risk management techniques so I don’t blow up my account.

And remember…

Trading is not about being right…or wrong…

Instead, it’s about how much you make when you’re right… and how little you lose when you are wrong.  

 

5. “You can win on a stock, but you cannot beat Wall Street all the time.”

What does this mean?

Well…

All trading strategies will make money in specific market conditions but not all conditions.

Two examples:

  • A trend-following strategy makes money in trending markets, and loses money in range-bound markets.
  • A mean reversion strategy makes money in a range-bound market, but loses money in a trending market

So…

Your trading strategy makes money when the market conditions are favorable to it.

But what happens when the market conditions change?  

Your strategy will go into downdraw and that’s where a strategy will lose to the markets.

There are 2 main ways to prevent confusion and exposing your account to risk like this.

1) Proper risk management

2) Multiple trading systems

1. Proper risk management

By having proper risk management techniques a trader can survive any size downdraw or adverse market condition.

When you can survive a downdraw, you set yourself up to thrive when favorable markets return for your strategy to make its money.

2. Multiple trading systems

By adopting multiple trading systems, you are able to diversify your trading account in order to perform well in any market condition.  

Since markets are always changing there is no way to possibly have a single system to capture every condition you will encounter.  

Instead, it’s best to have diversification with trading strategies that allow you to return in any market and minimize losses.  

This way, you will have a smoother equity turnover time and not feel the pain of a down draw as much as when you trade only a single system.

 

3 Key Takeaways From Jesse

Well, this is the thing…

There is no book or documentation that spells out Jesse’s trading strategy.

But if you read between the lines, study his quotes and biography, you will have a good idea of how he trades the markets.

And that is why trading quotes are valuable.  They can give you a window into a trader’s strategy that you can put to work for yourself.

So, I am going to share with you some key take-away principles that he adopts in his trading strategy.

#1 Trade with the trend

This means you want to buy high, and sell higher.

As we saw before, just “being too high” is not a reason for the markets not to continue higher.

Or being “too expensive” is not a reason to go short hoping for the markets to reverse.

Instead, it’s best to buy a stock in an uptrend and sell a stock in a downtrend, and let the trend work in your favor.

#2 Trade breakouts

Trading breakouts applies to #1 – trade with the trend.  

When trading breakouts, a trader will have precalculated entry and exit price to evaluate the profit and loss potential prior to sending the order.

There are many ways to trade a breakout, click here to learn more!

Risk tolerance is different for every trader so nobody trades a breakout the same.  

And that means there is no right or wrong way to trade a breakout.  

It all comes down to your tolerance to losses.

If you want to learn more, check out how to trade breakout patterns

#3 Ride the trend

Jesse started out his career as a scalper.  He went after short, quick gains instead of long, drawn-out trends.  

Then he evolved…and as a trader, you need to be adaptable to the markets with your strategies.  

When the markets started to trend more than chop, mean reversion strategies started to break down and fail.  

So…

If riding trends is a strategy that fits your trading style, you can use tools such as, moving averages, support and resistance, and average true ranges to help identify trades.

To learn more, check out how to correctly use stop losses and ride massive trends.

Conclusion

So, that’s it.  

Powerful insights and lessons learned from a legendary trader can help you significantly improve your trading.

And by using the lessons from the industry titans you can learn some incredible trading tactics…that can be applied to any markets and will give you explosive gains.

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