The story of legendary stock (and commodity) trader Jesse Livermore is a fascinating one whose trading career lasted for approximately 50 years. He was a self-taught trader where he made fortunes and lost fortunes speculating in trading the stock and commodities markets. Unfortunately, however, his life came to an abrupt halt that ending in a sad tragedy.
Livermore’s story and trading lessons are invaluable and are revered by many traders. His legacy should carefully be studied so that you can greatly benefit from what he has left behind.
Livermore’s Life
Livermore’s great joy in life was speculating in trading the financial markets. His demeanor was of a quiet nature and preferred trading alone without any distraction. He was a meticulous and calculated risk taker when it came to trading the markets which all began at a very early age of 14 years old.
As a little boy growing up on a farm in Massachusetts, the young Livermore was pulled out of grammar school for good by his father who needed him to work on the family farm instead of getting an education.
However, in the short period of time that Livermore was in grammar school, he demonstrated that he was indeed a bright kid by getting good grades and had an aptitude for math. Unknowingly to him at the time, his ambition and intelligence would soon enough become an incredible gift to him.
Although his father needed the young Livermore to work on the family farm instead of getting an education, Jesse wanted nothing to do with having a farming life. So, feeling like there was no other way to escape from this unwanted life, the young Livermore decided to run away from home at the very young age of 14 (1891).
The young Livermore told his mother on what he was going to do, and feeling like there was no other way for him, she gave him some pocket money along with her blessings as he headed down the nearest lonely road for a life unknown.
Ultimately, the young Livermore found his way to the city of Boston where he got a job as a clerk posting stock quotes for the financial brokerage firm Paine Webber.
In the beginning, Livermore just routinely did his job where the posting of the stock quotes didn’t really mean anything to him. He just noticed that they were somehow always changing. But, soon enough, it was this – “the changing of stock quotes” – that really started to intrigue him as his curiosity begged him to understand the reasons why.
After awhile, he soon became good at reading the stock quotes as they passed by on the stock ticker tape. With Livermore’s curiosity, he quickly turned this all into a fascinating game and started to keep a log of stock prices and made predictions about where prices may be going next. Soon, this fascinating game to Livermore would payoff with making massive fortunes from trading.
By the time of turning 15 (1892), the young Livermore had already earned his first $1,000 in trading profits. And, little did he know at the time, he was on his way to being forever ingrained in the history of the stock market as a legendary trader speculating in trading stocks (and commodities) where he made and lost fortunes.
Livermore’s first exposure to stock trading was with unregulated “loose running” business operations called “bucket shops” where betting was made on the prediction of future stock price movements without acquiring any right of stock ownership.
So, for the next several years, this how the young Livermore traded with these so-called “bucket shops” before being permanently banned from them after his trading system became too successful and was winning too much money from them.
Livermore now needed to find a new place to trade stocks. So, at the age of 21, he moved to New York where he would be able to trade with legally regulated and licensed stock brokerage firms that were members of the New York Stock Exchange.
Relying on his trading system of telling him where to position his trades for speculating in possible larger price movements, whether going “long” or “shorting” the financial markets, Livermore made a fortune from heavily shorting stocks (profiting from a decline in stock price) right before the devastating stock market crash of 1929. After the crash, his financial fortunes skyrocketed to an estimated $100 million dollars! As a result of this happening, Livermore made a name for himself and was known as the “Great Bear of Wall Street.”
Livermore experienced a life of great luxury that was made from his trading fortunes. He owned mansions, expensive vacation homes, limousines, a yacht as well as throwing lavish parties and wearing the finest custom made suits.
A Few Lessons Learned – The Hard Way
Follow Your Trading Rules:
Know your trading rules and follow them with discipline Livermore proclaimed (having a trading plan will greatly help in this regard). When Livermore would become undisciplined and start to abandoned his trading rules, he would usually start to lose money on his trading positions while his trading capital was badly taking a big hit – sometimes to the point of wiping out his trading account or even to the point of having to declare bankruptcy.
Patience is a Virtue:
Livermore learned that by being patient as a trader turned out to be a great virtue which paid-off handsomely. By being so, it allowed for trading opportunities to set themselves up according to the rules of his trading system rather than taking a hopeful stab or chasing trades well beyond their trading vantage points. This is how Livermore made the real big money in trading.
“It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”
– Jesse Livermore
Being patient also taught him that if there was no clear trading opportunity at hand then waiting patiently on the sidelines with cash available in reserves is much better to wait for just the right trading opportunity.
Chaos of Human Emotions:
Livermore also learned that human emotions (such as fear and greed) can destroy a trader’s mind and can lead to devastating financial consequences and personal breakdown when trading.
He knew that the markets were a massive collection of dysfunctional human psychology that was in constant battle. As a result, this is why the markets have a tendency to repeat themselves over and over again from the same underlying mistakes that are just committed from the changing hands of different people, since human nature never changes.
“Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.”
– Jesse Livermore
“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
– Jesse Livermore
Elements In Livermore’s Trading System
Livermore designed his trading system around what he deemed as being the most important elements as to his type of trading style that included:
- Timing
- Money Management
- Emotional Control
Livermore’s Trading System – Pivotal Points
Livermore’s trading system used a strategy known as pivotal points which provided him with an unbiased way to make trading decisions. It also greatly helped to stack the odds in his favor of what he deemed as being the most important elements contained in his trading system. Livermore’s trading system provided him with a big trading edge as to:
- Getting the Best Possible Price
- Most Advantageous Time From a Psychological Standpoint
- Beginning of a Much Larger Potential Price Movement
Pivotal points are significant price points where the prices of stocks (or other types of financial instruments) are in the beginning stages of a much larger potential price movement. As prices move closer to the pivotal points, they are closely observed to see how they will respond once they do reach the pivotal points. Upon how prices do respond, it can create ideal trading opportunities for either buying or “shorting” stocks (or other types of financial instruments) or even suggest when it’s time to get out of your open trading positions altogether.
According to Livermore – “Having patience for the pivotal points to setup is the key to timing success.”
The Power Of Pivotal Points
- Unbiased way to trade after the pivotal points have been reached
- Gauge the direction of a possible new significant trend (either continuation or reversal of)
- Buy or “short” at an ideal price at the most advantageous time from a psychological standpoint
- Start of a possible much larger trend
- Opportune time to build on already open trading positions
- Alerts to possible dangerous trading areas (risk management)
According to Livermore, there are 2 types of pivotal points (reversal and continuation) with each having their own unique traits:
Reversal Pivotal Points (trends reversing in direction):
- Suggests that the current direction of a trend may be about to change
- Ideal time from a psychological standpoint for the current trend to change its direction
- Massive trading volume should be evident
- A long running trend may possibly be overdue for a change in direction
Continuation Pivotal Points (trends continuing in same direction):
- Pullbacks (or rallies) are expected to happen on stronger moving trends
- Perfect time to build even larger positions to already open trading positions
- Suggests that the current trend has a good possibility of continuing in the same direction
Example – Pivotal Points:
Let’s say that a stock has been trending downward for some time and it hits a 3 month low of $50 and then has a temporary comeback with a quick rally to $53 and then climbs to $55 with ultimately hitting a 3 month high of $58. The 3 month pivotal points would be the $50 low and the $58 high.
Now let’s say that the stock has been falling since it hit that 3 month high of $58 and it now looks like it wants to come back down to retest the 3 month low of $50. As the price starts to move closer to $50 the behavior of the stock’s price would carefully be observed to see how it will possibly respond at that pivotal point low.
If the price of the stock breaks below the pivotal point low of $50 then “shorting” the stock would be considered. If the stock’s price goes down to retest $50 but bottoms out and starts to climb back again then buying the stock would be considered with a price target back to its prior 3 month pivotal point high of $58.
If the stock’s price breaks above the pivotal point high of $58 this would be a strong signal to build even larger positions to current open trading positions or to even open brand new trading positions as this may be the beginning point of a big trend that is going to possibly move much higher. If the stock’s price is having trouble advancing beyond $58 and the price starts to show signs of possibly tumbling back down then all current open trading positions should be sold off to protect existing profits or minimize any trading losses.
“Whenever I have had the patience to wait for the market to arrive at what I call a “Pivotal Point” before I started to trade, I have always made money in my operations.”
– Jesse Livermore
Livermore’s Trading Rules And Advice – Timeless
Livermore’s trading rules and advice was developed from his trading successes and failures that had produced both financial fortunes and ruins lasting approximately 50 years of trading. His time tested rules and advice is still followed just as strong today by traders as they were when Livermore first started to develop them as a young boy.
Here are many of Livermore’s timeless trading rules and advice that hasn’t yet already been discussed:
- Keep your profitable trades alive and running until there is no good apparent reason to keep them any longer
- Get on the right side of a trend by identifying an obvious one as moving in the same continuing direction
- Trading in range bound markets can restrict profits
- Trade the leading stocks in the strongest industries where the biggest gains can possibly be made
- In bull markets buy the strongest stocks. In bear markets short the weakest ones
- No stock should ever be considered too high to buy or too low to short
- Be ready to exploit new trading opportunities by keeping plenty of cash in reserves
- Spend your time more focused by watching a smaller list of opportune stocks rather than worrying about watching too many ones
- Use the broader markets as a barometer and trade in the same direction they’re implying
- Be aware of any changes to current market conditions and be ready to adopt to them. Use trading strategies that will best align to current market conditions to have the best chance in making profits
- Don’t let losing trades get out of control beyond that of your maximum risk tolerance rules. If necessary, don’t be afraid to cut losses quickly
- Use stop loss orders to manage trading risk
- Don’t trade just for the sake of trading which can be very detrimental
- Don’t buy more shares on losing positions when prices are going down (known as averaging down or in trading jargon throwing good money after bad money)
- Don’t meet a margin call by depositing the required funds to the broker. Just liquidate the losing position
- Learn how to control your emotions such as with fear and greed to help prevent making unnecessary trading mistakes
- As a trader, be the captain of your own “ship” by making your own trading decisions without listening to others or following the “noise” of the crowd
The Tragic Ending To The “World’s Greatest Stock Trader”
In the end, however, Livermore’s life ended in great tragedy.
He was married three times during his lifetime. Although, Livermore first two marriages ended in divorce, his third marriage ended much worse. Giving marriage at least one more chance, Livermore married his third wife Harriet Metz Noble on March 28, 1933. But, sadly though, all 4 of Harriet’s past husbands had at least one thing in common – they all died in the same way by committing suicide. Unfortunately for Livermore, he would soon do the same.
Having been broken down by life itself, including several divorces, financial trading ruins, bankruptcies, failed expectations as well as fighting clinical depression, Livermore shot and killed himself on November 28, 1940 in a New York City hotel at the age of 63 leaving behind his family included two sons.
At the time of his death, his financial worth was estimated to be $5 million – a far cry from the peak of his trading fortunes of $100 million.
Even with Livermore’s celebrated trading legacy and his massive trading fortunes, it all never came close to the true value of his personal happiness and self-worth in which he considered himself a failure in the end – resulting in a destroyed life that ended in a tragic death. This just may be the most important lesson to learn from the life of Jesse Livermore (1877 – 1940).
