3 Trading Rules From The ‘Great Bear Of Wall Street’

Jessie Livermore was one of the greatest traders of all time. He first began trading stocks nearly a hundred years ago, making and losing multi-million dollar fortunes several times over. 

His life and trading methods are recounted in the 1923 book “Reminiscences of a Stock Operator,” by Edwin LeFerve. The book is considered a classic among traders and is still read to this day (the hardback retails for $187.95 on Amazon). 

#-ad_banner-#Livermore began his career in what were called “bucket shops” — typically a warehouse or storefront where smaller speculators could make bets on the price movements of stocks (although actual shares were rarely bought or sold). Of course, this practice was highly risky, since corruption was rampant and the bucket shops allowed individuals to make bets on as little as 1% margin.

But somehow, Livermore was able to make $1,000 at the age of 15 (a small fortune back then). Later in life, he moved to New York and began trading in more legitimate markets.

Among his accomplishments:

— He shorted Union Pacific Railroad before the 1906 San Francisco earthquake
— Shorted the market before the Panic of 1907
— Made a second fortune during the WWI bull market
— Shorted the market before the 1929 crash

Livermore’s methods were simple. This was back before the U.S. Securities and Exchange Commission required companies to provide earnings reports, and market manipulation was more than commonplace. So Livermore just stuck to studying price movements, since there was no way of knowing the fundamentals of a company.

At one point just after the 1929 crash, Livermore was worth north of $100 million. But he had also lost a couple of fortunes before then. Like many speculators, he was prone to mistakes. He violated his rules from time to time, and it cost him big time.

Livermore’s mistakes defined him just as much as his successes. Maybe that’s why Reminiscences is still a prized handbook among traders to this day.

They say experience is the best teacher. But it can be a very expensive teacher in the markets. Reading about the successes and failures of Livermore and other great traders can help you avoid making the same mistakes while benefitting from their wisdom.

Some of the lessons my colleague Jimmy Butts has learned from Livermore are incorporated into his Maximum Profit trading system.

Take, for example, these three quotes:

      1) “Remember that stocks are never too high for you to begin buying or too low to begin selling.”

As Jimmy has cited time and time again, countless research shows that, generally speaking, stocks that are going up continue to go up. Period. It’s counterintuitive, I know. But with tools like relative strength (one of the pillars of Jimmy’s system), we can ensure that any stock we buy has the trend in our favor. Like Livermore, we want to buy stocks when they are going up.

      2) “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”

Here, Livermore was saying that we need to let the market tell us what to do, and sometimes it’s telling us to do nothing. If the Maximum Profit system tells us there is nothing to buy or sell, then nothing is exactly what Jimmy and his subscribers do. If the rules say to keep a trade open, they sit tight and don’t waste time fretting on whether to buy or sell.

      3) “Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.”

This can be summed up with the idea of “cut your losses short and let your winners run,” something Jimmy and his readers remind themselves of in every issue.

The most important lessons to be learned from Livermore are:

1. Buy stocks that are going up.
2. Hold them patiently as long as they continue to go up.
3. Sell quickly after they stop going up.

If you haven’t read “Reminiscences of a Stock Operator,” I highly recommend it. This is just a sampling of what we can learn about trading from old pros like Jesse Livermore. Even though the market is vastly different today, considering the rules and regulations — not to mention the instant access to more reliable information about companies — it still remarkably behaves the same way today as it did back then.

In fact, if you want to be a successful trader, read everything you can. (That includes Jimmy’s Maximum Profit newsletter. If you’d like to get his latest picks, you can go here.)