October 2006

Trading Tip:

Jesse Livermore
by Howard Arrington

My first introduction to the life of Jesse Livermore was in 2002 when Larry Pesavento loaned me a copy of the book "Reminiscences of a Stock Operator" by Edwin LeFevre.  This book is a beloved classic.  Many traders consider Jesse Livermore to be the greatest stock trader that ever lived.  He made over $100 million as America headed into the Depression.

My 2nd introduction to the life of this legendary speculator was by reading two books:  "Jesse Livermore:  World's Greatest Stock Trader" and "Trade Like Jesse Livermore", both written by Richard Smitten.   I met the author in 2005 in Salt Lake City when he visited Ensign Software and initiated a project to bring to the marketplace Livermore's trading techniques.  The Livermore project will have to be material for some future newsletter.

In this article I share brief material about the life of Jesse Livermore and his trading techniques.  My sources are the books by Richard Smitten.   Go to this web site to read the first chapter of each of Smitten's books.    Welcome to JesseLivermore.com

The book, "Jesse Livermore:  World's Greatest Stock Trader", is a fun book to read.  The book is a biography of Jesse's life.  Jesse was born in 1877 in Massachusetts to poor farmers.  As a boy he devoured books, magazines and newspapers, which expanded his imagination and high intelligence.  He wanted to escape the punishing life of a poor farmer.   At age fourteen his father yanked him from school and was told he would now work full-time on the farm.   Within weeks he ran away with $5 in his pocket to seek his fortune in Boston.

Upon his arrival in Boston he stopped outside the Paine Webber offices.   He was fascinated with the customers, ticker tape clicking, and gallery boys posting prices on chalkboards.  He found the manager, asked for a job and was hired to be a gallery boy.   He loved it.  Jesse was always the first one to the office.   Being a chalk boy was his enrollment in the Stock Market College.  He reveled in everything about the job and the markets.  He knew that someday he would be a rich man.

Jesse made a fortune in the crash of 1907, which he later lost, only to make and lose fortunes several more times.  He married a beautiful showgirl and they lived on Long Island in a magnificent mansion.  His 300 foot yacht ferried him to Wall Street each morning.  He sold the market short before the crash of 1929 and entered the Depression with more than $100 million in cash.

Jesse traded in absolute secrecy.   No one was allowed to speak to him when the markets were open.  His office on Fifth Avenue was highly secure and secretive.  His exhilaration was in beating the Street.  He knew that big money was made in big swings with big positions, and his trading style earned him the nickname of "Boy Plunger".   Livermore developed a plan, a strategy based on hard work and never ending analysis.  He believed there is only one way to achieve success in speculation  --  through hard work, persistently hard work.   

Livermore's aptitude for persistent hard work is probably the primary characteristic that I perceive is lacking with most traders today.  Many traders have characteristics that are exactly the opposite of Livermore's.   These are generalized observations, of course, but there is much truth in stating that many traders behave in the following way.

Today's traders are armed with computers and multiple monitors that display dozens of charts.  These charts are heavily dressed with complex studies, visual effects, alerts and automated trading systems.  If their real-time feed has even a few seconds of lag time, today's traders feel cheated out of a better fill price.  Technology has shortened the horizon of their vision, and the duration of their patience.   Traders have become impatient scalpers, pacified with a diet of  $100 successes.  Today's traders crave instant success and want an adrenalin rush every day.   And as a result, they trade away what they want most (big money) for what they want right now (a winning trade).  Trader's thrive on admiration and kudos from other traders.   If a trader has a hot streak, he is elevated by his peers to the status of mentor and others surrender independent thinking and fall into lock-step with the mentor's leadership.

Livermore looked ahead, evaluated the general conditions, moved prudently, tested first with a small position, and plunged only after he was convinced that all factors were in his favor.  He did his homework.  He was patient, and waited until the big swing came along.  He waited for his judgment to be confirmed.   Unfortunately, these characteristics and behaviors do not describe today's typical trader.

The DOW traded at an all-time high in October, 2006.  Therefore, let me comment on Livermore's use of new highs.  "New highs are very important for timing.  A new all-time high can mean that the stock has broken through the overhead supply of stock and the line of least resistance will be strongly upward.  Many people, when they see that a stock has made a new high, sell it immediately, then go to look for a cheaper stock."  (Jesse Livermore:  World's Greatest Stock Trader, page 276)

Here are a few more words of wisdom that seem appropriate to have in mind at this time.  "Do not use the words 'Bullish' or 'Bearish'.  These words fix a firm market-direction in the mind for an extended period of time.  Instead use 'Upward Trend' and 'Downward Trend' when asked the direction you think the market is headed.  Simply say:  'The line of least resistance is either upward, or downward at this time."   (Ibid., page 283)

"Stocks are never too high to begin buying or too low to begin selling short."  (Ibid., page 274)

"Watch the market leaders, the stocks that have led the charge upward in a bull market.  When these stocks falter or fail to make new highs it is often a signal that the market is turning.  As the leaders go, so goes the entire market."   (Ibid., page 276)

If you want to trade like Jesse Livermore, you will have to do the 'hard work'.   My first suggestion for appropriate hard work would be to buy and read Smitten's books.  The book "Trade Like Jesse Livermore" has considerable detail on how Jesse would prepare for his trading day, how he handled the media and news, how he did his own thinking and worked in secret.   The book gives specific advice in trading only the leaders, understanding industry groups and their movements, and shows the specific patterns Livermore used such as the Reversal Pivotal Point.  This book teaches about the importance of volume, and how to use trend lines and break-outs.

Some readers of this article will act on the advice to do 'hard work'.  Others feel they are already working hard, when in reality, they are just expressing they have found it is hard to be a successful trader.   

As Ensign Software celebrates its 25th anniversary, I look back at its beginning in 1981 and remember my youthful naïveté.  I appreciate the guidance and wisdom of several mentors I have learned from in my journey of the last 25 years.   Somewhere along the way, a maturing process occurred where I gained greater confidence in my own independent thinking.   A portion of that confidence and independence is reflected in the creation of Ensign Windows and its continual evolution.  Though I work hard at making Ensign Windows a great program so my customers will be better traders, I am guilty of not doing the 'hard work' like Jesse Livermore.  I am still enrolled in the Stock Market College.  Hopefully we are all enrolled and not skipping class or the homework assignments.  There is so much yet to learn even after 25 years.