What Are Jesse Livermore Principles in Trading

Who Was Jesse Lauriston Livermore

Jesse Lauriston Livermore was an early stock trader and investor who had an aggressive trading style. Many of the insights that Jesse pioneered still hold some value today when trading the markets.

He started trading right out of grammar school at the young age of fourteen. Maybe his many years of experience around trading lead to his aggressive trading style. He was a board boy at a Boston stock brokerage.

Board boy was the manual equivalent of ticker tape in modern trading.

Livermore’s life story has been well-documented in the book “Reminiscences of a Stock Operator” by Edwin Lefèvre, which is a fictionalized account of Livermore’s experiences. It is widely understood that the character is based on Livermore. Jesse Livermore’s trading principles were developed through years of experience and are still studied and applied by traders and investors today.

Jesse Livermore Principles Towards The Market

Some of the key principles he followed include:

1. Price action: Livermore believed that stock prices reflected all the available information about a company, and he paid close attention to price movements to identify trends.

• Price action analysis in futures trading focuses on understanding the market’s behavior through the study of price movements alone. Traders who use this approach believe that all relevant information is already reflected in the price and that analyzing its movements can provide valuable insights into market sentiment, trends, and potential trading opportunities.
  • Candlestick charts: Price action traders commonly use candlestick charts, which provide visual representations of price movements over a specific period. Each candlestick represents the open, high, low, and close prices for a particular time frame, such as an hour, day, or week.
  • Support and resistance levels: Price action traders identify significant price levels where the market has historically shown a tendency to reverse or consolidate. These levels, known as support and resistance, can help traders anticipate potential reversals, breakouts, or range-bound trading conditions.
  • Trend analysis: Analyzing the direction and strength of a trend is a crucial aspect of price action trading. Traders study the formation of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) to determine the prevailing trend and make trading decisions accordingly.
  • Chart patterns: Price action traders look for specific patterns that have formed over time, such as head and shoulders, double tops and bottoms, triangles, and flags. These patterns can help traders predict potential price movements and identify trading opportunities.
  • Breakouts and pullbacks: Traders using price action analysis may look for breakouts from established support or resistance levels or consolidation patterns. They may also look for pullbacks or retracements within a trend to enter trades in the direction of the prevailing trend.
  • Price action signals: Some traders use specific price action signals, such as pin bars, engulfing patterns, or inside bars, to make trading decisions. These signals can provide clues about potential price reversals, trend continuations, or market indecision.

2. Trend following: He often said, “The trend is your friend,” emphasizing the importance of following the market trend instead of fighting against it.

• Identifying the trend: The first step in trend following is to determine the direction of the market’s prevailing trend. This can be done through various methods, such as observing price action (higher highs and higher lows for uptrends, lower highs and lower lows for downtrends), or using technical indicators like moving averages or trendlines. Identifying the trend’s direction helps traders align their trading decisions with the market’s momentum.
  • Price action analysis: Observing price action is one of the simplest and most effective ways to identify the trend. In an uptrend, the market forms a series of higher highs and higher lows, indicating that buyers are in control. Conversely, in a downtrend, the market forms lower highs and lower lows, suggesting that sellers have the upper hand. When the market moves sideways, with no clear higher highs or lower lows, it’s considered to be in a range or consolidation.
  • Moving averages: Moving averages (MAs) are popular technical indicators that smooth out price data over a specific period, making it easier to identify trends. Commonly used moving averages include the simple moving average (SMA) and the exponential moving average (EMA). When the price is above a chosen moving average, the trend is considered bullish, and when it’s below the moving average, the trend is bearish. Traders can also use moving average crossovers, such as the golden cross (when a short-term MA crosses above a long-term MA) or the death cross (when a short-term MA crosses below a long-term MA) to signal a change in trend direction.
  • Trendlines: Trendlines are diagonal lines drawn on a price chart to connect a series of higher lows in an uptrend or lower highs in a downtrend. These lines can help traders visualize the direction and strength of the trend. A trendline that remains intact for a longer period indicates a strong trend, while a broken trendline may suggest a potential trend reversal or weakening trend.
  • Channels: Channels are formed by drawing parallel trendlines connecting the series of higher highs and higher lows in an uptrend or lower highs and lower lows in a downtrend. Channels help traders identify the boundaries within which the price moves and can provide additional insights into the trend’s strength, potential reversal points, and trading opportunities.
  • Technical indicators: In addition to moving averages, traders can use other technical indicators, such as the Average Directional Index (ADX), the Moving Average Convergence Divergence (MACD), or the Relative Strength Index (RSI) to help identify the trend direction and strength. Each indicator has its unique method of analyzing price data to provide information about the trend.
  • Multiple time frame analysis: Traders can also use multiple time frame analysis to get a more comprehensive view of the trend. By analyzing the price action or technical indicators across different time frames (e.g., daily, weekly, or monthly charts), traders can gain insights into the broader market context, helping them confirm or refine their assessment of the prevailing trend.

3. Don’t fight the tape: Livermore emphasized the importance of not trading against the market’s overall direction. He believed that traders should align their trades with the broader market trend, as going against it often results in losses.
4. Cut losses quickly: Livermore believed in cutting losses as soon as a trade went against him. He considered this a crucial aspect of risk management and protecting one’s trading capital.

• Stop-loss orders: Trend following strategies typically use stop-loss orders to protect against adverse price movements and limit potential losses. Traders place stop-loss orders at a predetermined level, often based on technical analysis or a specific percentage of their account size. If the market moves against the trade, the stop-loss order will be triggered, and the position will be closed to minimize losses.l
  • Determine risk per trade: Before entering a trade, it’s essential to decide how much of your account you are willing to risk on each trade. A common rule of thumb is to risk no more than 1-2% of your account on any single trade. This helps manage risk and ensures that no single trade will have a significant impact on your overall account balance.
  • Set a proper risk-reward ratio: It’s important to consider the potential reward in relation to the risk you’re taking when entering a trade. A favorable risk-reward ratio (e.g., risking $1 to potentially make $3) ensures that even if you have a relatively low win rate, you can still be profitable in the long run. By setting a minimum risk-reward ratio for each trade, you ensure that you’re only taking trades with a good potential payoff relative to the risk involved.
  • Be disciplined: Cutting losses quickly requires discipline and adherence to your trading plan. It’s essential to stick to your predetermined stop-loss levels and not let emotions like fear or hope influence your decision-making. Emotional decisions can often lead to holding onto losing positions for too long, hoping the market will turn around, which can result in larger losses.

5. Let profits run: Livermore advocated for allowing winning trades to continue as long as the market trend was in favor. He believed that traders should not prematurely exit a profitable position, as it could limit potential gains.

• Letting profits run is a trading principle that encourages traders to hold onto winning positions to maximize profits when the market moves in their favor. This approach is particularly relevant in trend-following strategies, where the goal is to capture as much of a sustained price movement as possible. By letting profits run, traders can potentially benefit from larger gains, which can help offset smaller losses and contribute to overall profitability.

  • Use trailing stop-loss orders: A trailing stop-loss order is a type of stop-loss order that moves with the market as the price moves in your favor. It automatically adjusts to lock in profits while still allowing for potential further gains. This provides a way to protect your profits without prematurely exiting a trade that still has potential to continue in your favor.
  • Set profit targets: While the idea of letting profits run suggests keeping trades open for as long as possible, it’s still important to have an exit strategy in mind. Setting profit targets can help traders decide when to take profits or reassess their positions based on the market’s behavior at specific price levels. Profit targets should be based on technical analysis, market structure, or a predefined risk-reward ratio.
  • Use technical indicators: Technical indicators, such as moving averages, Bollinger Bands, or Parabolic SAR, can help traders identify trend strength and potential reversal points. By using these indicators to analyze the market, traders can make informed decisions about when to exit a trade or adjust their trailing stop-loss orders.
  • Be patient: Letting profits run requires patience and discipline, as it can be tempting to take profits early when the market moves in your favor. However, sticking to your trading plan and giving the market time to unfold can result in larger gains in the long run. Keep emotions in check and stay focused on your overall trading strategy.

6. Patience and timing: Livermore stressed the importance of waiting for the right opportunity before entering a trade. He believed that patience was key in identifying the optimal entry points, as entering a trade too early or too late could result in losses.
7. Money management: Livermore considered managing risk and preserving capital to be critical aspects of successful trading. He suggested using stop-loss orders and position sizing to limit losses and protect one’s trading account.
8. Trading psychology: Livermore believed that understanding one’s emotions and maintaining discipline were essential components of successful trading. He advised traders to remain objective and not let fear or greed dictate their actions.

• Trading psychology refers to the emotional and mental aspects of trading that can impact a trader’s decision-making process and overall performance. Successful trading requires not only technical and fundamental analysis skills but also the ability to manage emotions and maintain discipline in the face of market
  • Emotional control: Emotions such as fear, greed, hope, and regret can significantly impact a trader’s ability to make rational decisions. Learning to control these emotions is essential for maintaining a clear and focused mindset when trading. Techniques such as meditation, deep breathing, and visualization can help traders develop emotional control and stay calm under pressure.
  • Discipline: Trading discipline involves consistently adhering to a well-defined trading plan, including entry and exit rules, risk management guidelines, and position sizing. Maintaining discipline is crucial for long-term trading success, as it helps traders avoid impulsive decisions and stick to their strategy even during challenging market conditions.
  • Patience: Patience is a vital aspect of trading psychology, as it allows traders to wait for the right trading opportunities and avoid overtrading or jumping into low-quality setups. Developing patience can help traders focus on the quality of their trades rather than the quantity, leading to improved decision-making and performance.
  • Confidence: Confidence in one’s trading abilities and strategy is crucial for making decisive and well-informed decisions. Traders can build confidence through education, practice, and consistently following their trading plan. However, it’s important to avoid overconfidence, which can lead to excessive risk-taking or neglecting risk management principles.
  • Risk tolerance: Understanding and accepting one’s risk tolerance is an essential aspect of trading psychology. Traders should know how much risk they are willing to take on each trade and set stop-loss orders accordingly. This helps to manage emotions and ensures that traders can handle the inevitable losses that come with trading.
  • Dealing with losses: Losses are a natural part of trading, and learning to accept and learn from them is crucial for long-term success. Developing a healthy mindset toward losses can help traders avoid negative emotional spirals and maintain a positive attitude during drawdowns.
  • Setting realistic expectations: Having realistic expectations about trading outcomes, timeframes, and potential returns can help traders maintain a healthy perspective and avoid frustration or disappointment. Unrealistic expectations can lead to impulsive decisions, excessive risk-taking, and emotional distress.

Was Jesse Livermore A Trend Follower?

Yes, Jesse Livermore is often characterized as a trend follower, which is a trading strategy that involves buying stocks or other securities that have been trending up, and selling securities that have been trending down.

Livermore’s approach was to identify the market’s overall direction and then place trades that aligned with that direction. He is often quoted as saying, “The trend is your friend,” emphasizing the importance of not trading against the market’s momentum. This approach requires patience and discipline, as it involves waiting for the right opportunities to present themselves rather than trying to force trades.

In his book “Reminiscences of a Stock Operator,” which is a fictionalized account of his trading experiences, Livermore discusses the importance of understanding the broad market trend and the trends of individual stocks. He notes that he made his biggest profits by identifying significant market trends and holding his positions until the trend changed.

However, it’s worth noting that while trend following was a key part of Livermore’s trading strategy, he also used other methods, and his approach evolved over time. He was known for his meticulous record-keeping and analysis, and he continually refined his strategies based on his experiences.

Jesse Livermore principles are still relevant even today

These principles are still considered relevant and valuable by many traders and investors today. However, it is important to remember that Livermore’s aggressive trading strategies and lack of consistent discipline also led to multiple bankruptcies throughout his career. While his principles provide valuable insights, they should be applied with caution and a clear understanding of the risks involved in trading.

Jesse Livermore Pivotal Points Pioneer

Pivotal points can be considered specific price levels in the markets that, when breached, often lead to significant price moves. This concept aligns with Livermore’s emphasis on trend following and waiting for the right timing in the market.

While the term “pivotal points” wasn’t used by Livermore himself in his writings, it’s become associated with his trading style due to his approach to identifying key price levels where a stock’s direction could change. He was known for his careful study of the market, and his methodical approach to identifying these points has been widely studied and imitated by traders.

Livermore’s approach was not based on complex calculations or algorithms, but rather on his meticulous observations and understanding of market psychology and supply and demand dynamics. When a stock reached a price level where he believed supply and demand dynamics would cause a significant price move, he would take a position accordingly. This approach required patience, discipline, and a deep understanding of market behavior.

Why was Jesse Livermore Important?

Jesse Livermore is considered one of the most influential traders in history, and his life and trading methods continue to be studied by traders and investors today. Here are a few reasons why he was, and remains, important:

1. Successful Speculator: Livermore was one of the most successful stock market speculators of his time. His fortunes rose and fell multiple times over his career, but at his peak, he amassed a wealth equivalent to over a billion dollars in today’s money.

2. Market Timing: He was known for his ability to time the markets, most notably shorting the stock market ahead of the 1907 and 1929 crashes, leading to enormous profits.

3. Trading Principles: Livermore’s trading principles, such as trend following, careful planning, patience, and risk management, are still widely studied and applied by traders today.

4. Influence on Trading Literature: Livermore’s semi-autobiographical book, “Reminiscences of a Stock Operator,” remains one of the most popular and influential books on trading, providing valuable insights into market psychology and trading strategies.

5. Cautionary Tale: Despite his financial success, Livermore’s life serves as a warning about the potential risks of stock market speculation. He experienced significant financial and personal lows, including bankruptcy and depression, and his life ended in tragedy.

6. Psychological Aspects of Trading: Livermore’s experiences highlighted the psychological challenges associated with trading, such as the emotional discipline required to stick to a trading plan and the stress associated with significant financial losses.

Overall, Livermore’s legacy in the world of trading is significant, both for his successes and the lessons learned from his failures.

How Reliable Is Pivot Points In Trading?

Pivot points are a tool used by traders to determine potential support and resistance levels. They are calculated based on the high, low, and closing prices of the previous trading session.

The reliability of pivot points, like any technical analysis tool, isn’t absolute. They can provide valuable insights, but they are not foolproof and should not be used in isolation. Here are a few points to consider:

1. Context: Pivot points are most useful when used in conjunction with other technical analysis tools and indicators. For example, they can be combined with other forms of support and resistance, trend lines, chart patterns, or technical indicators to confirm trading signals.

2. Market Conditions: The effectiveness of pivot points can also depend on market conditions. For instance, in a trending market, prices may consistently stay above or below a certain pivot level, indicating the trend’s strength. In a range-bound market, prices may oscillate around a particular pivot level, providing potential buy and sell points.

3. Limitations: Like any technical analysis tool, pivot points don’t predict the future. They simply provide a framework for understanding potential price levels of interest. They can’t account for unexpected news or events that can drastically affect market prices.

4. Discipline: Even the best technical analysis tools will fail without proper trading discipline. This includes setting appropriate stop-loss and take-profit levels, managing risk, and maintaining emotional control.

5. Backtesting: Before using pivot points or any other technical analysis tool in live trading, it’s essential to backtest the tool on historical data. This can provide an idea of how effective the tool might be under different market conditions.

Remember, while pivot points can be a helpful part of a trading strategy, they don’t guarantee success and should be used as part of a comprehensive trading plan.

A Few Of Jesse Livermore Quotes

Jesse Livermore left behind a number of quotes that provide insight into his trading philosophy. Here are a few notable ones:

1. On Patience: “It was never my thinking that made the big money for me. It always was my sitting.”

2. On Trend Following: “The market is designed to fool most of the people most of the time.”

3. On Emotional Trading: “Play the market only when all factors are in your favor. No person can play the market all the time and win. There are times when you should be completely out of the market, for emotional as well as economic reasons.”

4. On Planning and Discipline: “It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”

5. On the Importance of Learning from Mistakes: “There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.”

6. On Market Movements: “The market does not beat them. They beat themselves, because though they have brains, they cannot sit tight.”

7. On Risk Management: “Remember that stocks are never too high for you to begin buying or too low to begin selling.”

8. On Price Movements: “Prices are never too high to begin buying or too low to begin selling.”

These quotes reflect Livermore’s emphasis on patience, discipline, emotional control, and learning from one’s mistakes. His insights continue to be widely studied by traders today.

Did You Know Jesse Livermore Net Worth

Jesse Livermore was known for making and losing several fortunes during his lifetime. At his peak in the aftermath of the stock market crash in 1929, it’s reported that he had a net worth of over $100 million, an extraordinary sum for the time and equivalent to well over $1 billion in today’s dollars when adjusted for inflation.

However, Livermore’s fortune was extremely volatile due to his speculative trading style and personal issues. It’s also important to note that while Livermore made enormous sums of money, his life story is often used as a cautionary tale in the world of finance.

What Is The Pivot Point Strategy?

The pivot point strategy is a trading technique based on the use of pivot points, which are calculated using the high, low, and closing prices from the previous trading period (often the previous day, but it can also be a week, month, etc.). The pivot point itself is the average of these three prices, and it serves as a reference point for the trading day.

From the main pivot point, additional levels of support and resistance are calculated, often referred to as S1, S2, S3 (support levels) and R1, R2, R3 (resistance levels).

Here’s how you might use pivot points in a trading strategy:

1. Trend Identification: If the price starts above the main pivot point, it’s seen as a bullish (upward) trend for the day, and if it starts below, it’s seen as bearish (downward).

2. Entry and Exit Points: Pivot points can provide potential entry and exit points. For instance, in an upward trend, a trader might consider buying when the price bounces off a support level (e.g., the pivot point or S1) and selling or shorting when the price approaches a resistance level (e.g., R1 or R2).

3. Stop-Loss Points: Pivot points can also help set stop-loss points. For example, if a trader enters a long position at the pivot point, they might set a stop-loss at the next support level down (S1).

4. Breakouts: If the price breaks through a resistance level, it could indicate a strong upward trend and signal a buying opportunity. Conversely, if it breaks through a support level, it could indicate a strong downward trend and signal a selling or shorting opportunity. In both cases, the broken support or resistance level often serves as the new resistance or support level.

Remember, while pivot points can provide a useful framework for trading, they don’t predict the future, and they should be used in conjunction with other technical analysis tools and indicators. Also, it’s important to manage risk carefully, including setting appropriate stop-loss points and not risking more money than you can afford to lose.

What Are Two Interesting Facts About Jesse Livermore?

Jesse Livermore’s life was filled with ups and downs, making it a fascinating story. Here are two particularly interesting facts about him:

1. Spectacular Market Timing: Jesse Livermore is most famous for his remarkable market timing during the stock market crashes of 1907 and 1929. During the Panic of 1907, he netted around $3 million. But his most spectacular play came during the 1929 crash, where he went massively short and is believed to have made around $100 million, an amount equivalent to over $1 billion in today’s terms when adjusted for inflation. His uncanny ability to predict market trends led to rumors that he could single-handedly move the markets.

2. Multiple Fortunes Gained and Lost: Livermore made and lost several multi-million dollar fortunes throughout his life, filing for bankruptcy multiple times. His financial situation was often as volatile as the markets he traded in, swinging from extreme wealth to debt-ridden lows. Despite his financial acumen in the stock market, he struggled with maintaining his personal finances, a factor that contributed to his eventual suicide in 1940.

These facts underscore the high-risk, high-reward nature of stock market speculation, as well as the potential psychological toll it can take. Despite his enormous financial success, Livermore’s life serves as a cautionary tale about the potential pitfalls of speculative trading.