I have read pretty much every book on Jesse Livermore. He really was one of the great traders who correctly called the 1907 panic and 1929 crash. Not only did he predict these crises, he profited handsomely and by 1930 was worth $100 million in cash. If you want a simple bio check out wikipedia. What I am going to discuss are the lessons I have learned from him and his trading strategy.
1. Never be Bullish or Bearish---Livermore hated these emotional terms. Instead he was interested in the line of least resistance (trend). You make money by following the trend (up or down).
2. Forget ideology---Some people will only buys stocks and some people will only sell stocks short. Livermore knew that to make money in the stock market you have to be flexible. He did not care whether he was 100% long the market or 100% short.
3. Trade for the Big Money---Livermore was not interested in scalping 2-5% on some quick trade. He had made this mistake when he was young. By the time he matured he knew that it was simply not worth trading for small wins. He wanted to make alot of money and the only way you can do this is to take a large position and ride the line of least resistance. He played big trends for 30%-200%. That is how you make a fortune in the stock market.
4. Playing the Big Trend Requires Patience---Livermore used to say that he did not make his money trading but instead sitting and waiting. This has to be one of the hardest lessons for traders who feel they have to be trading every day. Livermore would sometimes hold his positions for over a year as long as the stock acted right.
5. Cut Your losses and let your winners run---This is probably the most important lesson. When Livermore purchased a stock or commodity he would set a stop loss of 8%. This was to protect his portfolio from dramatic losses. When you have gains do not be in a hurry to book them. You will often hear investment advisers tell you that you can never go broke taking a profit. Livermore's response was that you don't make very much either. This is a hard concept for traders, especially if the stock they bought at 50 goes to 58, but then starts to fall back to 53. They fear that they will end up taking a loss. Livermore would remain firm and hold the position as long as he did not get stopped out and he still liked the stock.
6. Never establish a full position immediately---If Livermore wanted to establish a $100,000 position in a stock he would not do so all at once. He would first commit 25% or 25,000 at say $40 a share. If the stock rose to $41 he would commit another 25%. If the stock initially fell to $39 he would sit tight without adding to his position. The key here is that he would never average down which he though was suicide. If you by a stock because you think it is going up and it goes down, why would you add to a losing position. Instead Livermore would only average up. This kept him on the right side of the market.
7. Never listen to stock tips or watch CNBC---Livermore never took stock tips or listened to what he read in the media. He knew that the media was used by stock speculators to manipulate prices and he did want to get screwed. Today that means avoiding CNBC and other media outlets who offer financial advice. Do your own homework because your are responsible for your trading performance. Livermore used to say that he did not need any help losing money because he could do that on his own.
8. You cannot beat the market all the time---Livermore only traded a few times a year. He would wait for the perfect set up either long or short. He did this because he knew that it was impossible to beat the market on a consistent basis day after day. There are only a few times a year where the odds on your side.
9. You will violate your own rules--Livermore had this problem throughout his career and it cost him dearly. He was once convinced by a expert cotton trader to go long cotton even though he was currently short cotton. Livermore for some reason broke his own rules by taking a tip and continuing to buy cotton even as it declined. He eventually sold out after losing millions. Livermore often questioned why he would consciously violate his own rules but could not explain it.
10. The Market is never wrong--Many traders blame their losses on irrational market movements. This is a puerile mental attempt to shift blame from yourself to others. It is also asinine and a waste of your time. Livermore never did this--he took responsibility for his losses.
If you are interested in reading more about Livermore there are two books I would recommend 1) Reminiscences of a Stock Operator by Edwin Lefèvre 2) How To Trade In Stocks by Jesse Livermore.
Disclosure: No positions