In this modern age of instantmarket access, high-frequency
trading and real-time news, there really is nothing new under the
Thestock market still goes up and goes down, investors still
make and losemoney , and the basicmarket dynamics between a buyer
and a seller remain the same. Many market lessons taught a
century ago still ring true today.
One of the most influential and successful stock market
speculators of all time is the legendary Jesse Livermore. Many
lessons can be learned from both his successes and failures,
which were epic in scale. He made and lost several fortunes over
his career, and his life ended tragically.
Livermore was keenly aware of his own shortcomings. Although
this knowledge wasn't enough to save him, the wisdom he shared
with the world is as much worth heeding today as it has ever
been. Let's take a closer look at the man once called the
"Speculator King" and one of his powerfulinvesting
Fortunes Won, Fortunes Lost
Jesse Livermore's dad wanted him to be a farmer, but this born
investor knew from a very early age that his calling was the
stock market. After he left home at 14, his mathematical ability
and love for the market landed him a job as a quotation changer
at astockbroker 's office in Boston. He started dabbling in the
market by risking his salary in the off-exchange stock-trading
parlors known as bucket shops. Think of modern-day off-track
betting facilities -- but stock prices, rather than horses, are
used as betting tools. His math-oriented brain quickly began to
discern repeating patterns in the stock prices.
||Jesse Livermore is one of the most influential and
successful stock market speculators of all time.
By the time Livermore was 21, this skill had earned him enough
money to move to New York City, where this young financial wizard
turned his full attention to the legitimate markets. Quickly
building a reputation as a master stock trader, he earned around
$3 million shortingstocks during the 1907 crash.
Despite his success, he was forced to declarebankruptcy after
losing 90% of the $3 million he made during the 1907 crash. This
was mostly due to a single trade in cotton in which he broke his
personal investing rules by continuing to buy thecommodity as it
was dropping in price.
Starting again with a greatly diminished portfolio, he was
able to ride the World War I-drivenbull market to another large
trading stake. His legendary status was cemented when he
successfully shorted stocks during the great crash of 1929,
earning over $100 million.
Although he had great success, he also had his demons. Being
married three times -- the third to a woman whose previous four
husbands had committed suicide -- clearly shows a personal life
in serious disarray.
By 1934, this once-mighty fixture of thefinancial markets was
broke again, and his membership to the Chicago Board of Trade was
automatically revoked due to lack ofcapital .
Finally, in 1940, a lifelong battle withdepression ended in
his suicide in a coatroom at a New York hotel. Despite claiming
to be completely broke, thisinvestment wizard is said to have
left $5 million incash and trusts at his death. Much more
important than his money, however, is the timeless wisdom
Livermore left for all investors.
The Most Important Rule
Today, 73 years after his death, investors still follow the
investing wisdom he left for the ages in his book "How to Trade
in Stocks," as well as in "Reminiscences of a Stock Operator," a
fictionalized account of his life. I strongly recommend these
books to anyone interested in the building blocks of
The primary lesson I learned from Livermore's writings is
simple yet profound. He taught to look for obvious trends in
price, set a price level on the chart (which he called pivot
points), then buy or sell the stock depending on how price acted
once it hits the pivot point.
Pivot points are the same thing as thesupport andresistance
levels that I talk about in my articles. In fact, Livermore's
idea on how to trade pivot points has had a profound influence on
the way I approach the market. It is the basic idea behind my
Channel System for entering trades and longer-terminvestments .
This tactic, although perhaps older than Livermore himself, still
continues to be a steady source of profits for many
Here's how it works: Imagine a stock's pivot point to be at
$25. Once price hits $25 on the way up, you wait for price to
break through the line for a certain number ofticks . You could
wait for price to hit $25.50 then enter your position long. On
the other hand, if price hits the $25 pivot or resistance point
and starts falling, you would enter short at $24.50 in the
anticipation that the down movewill continue.
Livermore's investing tactic is the building block ofmultiple
different strategies. Here is an example using
Rite Aid (
Livermore likely would have seen a pivot point in thedouble
bottom formed in March and April. He would have entered on the
bounce off this level, potentially doubling his money. The
current pivot point/support level is at $2.80. Livermore would
probably wait for the bounce to be confirmed at $3 prior to
entering the trade.
Risks to Consider:
Just because you are using the same pivot points that you
believe Jesse Livermore would have used is in no way aguarantee
of profits. Remember, prices can do anything, regardless of pivot
points. Money management rules are the key to making the system
work. Livermore was a huge proponent of letting winners run and
cutting losses. If prices move against your position after you
enter a trade based on a pivot point, close the position after
the support or resistance at the original pivot point fails. You
can always re-enter the trade later.
Action to Take -->
Make it a point to read Livermore's books and try to incorporate
his ideas into your investment philosophy. I elaborated on just
one of his trading tactics -- his books delve into many more.
There are many life lessons, positive and negative alike, to
learn from his experience. Livermore said that every time he
failed, it was because he broke his own rules. Take this wisdom
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