Jesse Livermore, Straight Shooter of Wall StreetHis Life 1870- 1940Jesse Livermore began his illustrious stock trading career at a very young age. A friend convinced him to pool their money together and invest in Burlington stock. Jesse made $3.12 in profit. He invested $5. Not a bad return on investment in any century.At 13 years old he worked at a brokerage office in Boston. He posted stock prices on a big board for all to see. Jesse excelled at mathematics as this allowed him to see patterns among the prices. His keen understanding of stock prices gave him the confidence to trade for himself. By the age of 15 he made over a thousand dollars. By age 21, he made ten thousand. Jesse Livermore took his show on the road and traded in what is now illegal, Bucket Shops. As he reaped profits; he was soon banned from these shops. He moved on to trade in more legitimate markets. After years of intense study and analysis he devised a set of trading rules. His successes made him a stock market celebrity. He made millions by shorting the market crashes of 1907 and 1928. Even JP Morgan asked him to please refrain from shorting during the country’s time of crisis.
Jesse livermore lost millions and made millions. He even declared bankruptcy. His mishaps were blamed on listening to other people’s stock tips and not cutting his loses short; two of his major rules. After battling lifelong clinical depression, Jesse Livermore committed suicide on November 28, 1940.
His LessonsJesse Livermore was a trader who managed probabilities. He knew stock prices had future events already factored in. Since no one knows what those future events were, and the stock surely wasn’t saying anything, unpredictable trading results occur. To combat this Jesse tried to get as many conditions on his side as possible. If Jesse Livermore was going long, the market had to be in an uptrend. The stock had to be going up and the industry group had to be doing well. All these things don’t guarantee a profitable trade. But at least you’re managing probabilities. As in any business venture nothing is certain; but you can increase the probability of success. Stick With Leaders Jesse Livermore noticed several things about stock market leaders in a trending market. Their price kept going up. That’s how you make money. He would look for industry groups that were leading the market and trade only the leaders of that group. This made perfect sense. A leading industry group means only one thing: the group has more rising stocks than other groups. Not rocket science, but when you're risking your own money, you don't want it to be.
By trading only stocks in a leading industry group you can focus on that subset of stocks actually rising. He avoided weak stocks and their industry groups. The probabilities were too great of losing money. Unless he felt inclined to short. Sites such as Yahoo! Finance and www.Clearstation.com offer rankings of top industries, and within those industries you can sort the best stocks. It sounds like such a simple way of finding stocks that are actually rising. Does anyone do it? The Probing Strategy If Jesse found a stock he liked, he would decide in advance how many shares he’d buy. If he decided to buy 400 shares of AAPL, he’d first purchase 100. If the price increased, he’d buy another 100; then finish with a purchase of 200 shares if it kept rising. He needed confirmation that the stock is making him money. What better way to confirm a stock price is going up…than if it’s going up.
Jesse Livermore was equally adept in shorting. If a stock kept going down after each short sale, then you have a trend confirmation. Not wishful thinking. I’m sure you’ve heard this before: Don’t average down. Only buy more of a stock that’s going up. Sure, you’ll pay a bit more, but that’s the price you pay to stay safe. The Pivot Point The Pivot Point is the optimum time to buy or short a stock. What is it? Jesse describes The Pivot Point as the psychological indication that a stock is about to change its trend. If the stock was trending down, then on a huge surge in volume starts to go up, there may be a bullish future. There is no clear cut model you can assign to find this point. It’s about identifying a stock that resembles these criteria and putting probabilities in your favor. Waitng for confirmation such as prices closing higher for several days is bullish confirmation. And example is BCRX. 
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Near the end of June BCRX appears to be trending down. However, we get a huge spike in volume and we close up for the day. Jesse Livermore would've kept his eye on this stock. We don’t want a false breakout. We break through the resistance levels of June and the stock heads toward its 52 week high. By purchasing BCRX between the end of June and early July there was money to be made come August. That, is the Pivot Point gentlemen. Find a trender & sit tight. Watch for breakouts from a consolidation or relatively flat trading range. Let’s return to BCRX. Throughout July we had a small consolidation. Then we have a price breakout in early August with increases in volume. The stock surpasses the prices of July and away it goes. Wait for confirmation… not wishful thinking… and watch the profits rise.
Losers Jesse felt if the price at which you own the stock drops by 10%, sell it (William O’Neil says 8%). You increase wealth by keeping loses to a minimum and maximizing gains. Can’t watch the market all day? Who can? Set up a Stop Order. This order automatically sells your stock when it reaches a certain price. All Time Highs Many investors are afraid of the 52 week high. If they own the stock, they feel it won't go higher, so they sell it. Breakouts to new highs accompanied by strong volume are great situations. It means Wall Street institutions have jumped on the band wagon and their purchasing power has continued to push prices up. Previous resistance levels have been broken and there's nothing but blue skies up ahead.
Points To Remember Don’t be too concerned about day to day fluctuations. You’re not day trading. It’s the overall trend you want to watch. When going long (or going short, the opposite of this is for you), make sure: • The market is in a confirmed uptrend. • Stick with the strongest stocks within the strongest industry groups. You can’t go wrong. If you look to trade other stocks cause they're cheap, you're gambling. • When the leading groups look like they’re beginning to break down that could be a warning the general market is headed for a drop.
• Look to buy stocks as they reach new highs by breaking through previous resistance levels. Increases in volume as I said before, are confirmations. • Let your profits ride. Don’t get greedy and sell to soon. If your stock is acting like a winner, big money is made in the sitting. You can sell some of holdings and bank it. • If your stock is drifting aimlessly, sell it. There are plenty others to chose from that are trending up or poised for a reversal in trend. • Get rich quicker. After you place an order, establish a Stop Order at 10% below the purchase price. You'll focus better at work and won't keeping checking the price. As the stock moves just above your purchase price, move the Stop order to that level. You've now protected your investment. • Confirm your stock is acting correctly. Find a similar stock within the industry. For example, if you own Oracle, check the stock chart of SAP for similarities. Most finance sites provide similar companies to the ones you are following.
• Must Read: Reminiscences of a Stock Operator. This terrific book is based on Jesse Livermore's trading experience and lessons. Written in 1923, this book captures the essence of the period and offers a plethora of advice. Shootings, wine, women and song are not included. • If your stock has been trending for a long time, volume is increasing and the price begins to get choppy; it may be time to sell. The public is now chasing it and the institutions are gladly selling their shares. After the public buys these shares and the price starts to drop, the public will sell and the institutions will gladly buy back the discounted shares. Repeat when necessary. What goes down, assuming the company is not a total mess, will go up.
And the game goes on. “There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again and again and again. This is because human nature does not change…” --Jesse Livermore
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